AMERICA S EXPORT BUSINESS: Remaining true to our mission 2018 ANNUAL REPORT

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1 AMERICA S EXPORT BUSINESS: Remaining true to our mission 2018 ANNUAL REPORT

2 Heritage of Success FOUNDED BY ASSURED FINANCING AND SUPPORTING AMERICAN EXPORTS

3 TABLE OF CONTENT Chairman s Letter 02 Business Year in Review 04 Summary of PEFCO s Business 08 PEFCO s Relationship with Ex-Im Bank 16 Management s Discussion & Analysis 22 Independent Auditor s Report 26 Financial Statements 28 Management s Report on Internal Control over Financial Reporting 53 Five Year Financial Data 54 Independent Audit Fees 55 Board of Directors 56 Officers 57 Advisory Board 58 PEFCO Shareowners 59 Additional Information 60 1

4 LETTER TO SHAREOWNERS RIGHT: RICHARD S. ALDRICH, JR. EXECUTIVE CHAIRMAN LEFT: TIMOTHY C. DUNNE PRESIDENT & CHIEF EXECUTIVE OFFICER To Our Shareowners: THE FISCAL YEAR ENDED SEPTEMBER 30, 2018 SAW A CONTINUATION OF THE DIFFICULT OPERATING ENVIRONMENT FOR PRIVATE EXPORT FUNDING CORPORATION ( PEFCO ), DUE TO THE CONTINUED LIMITATIONS ON APPROVALS OF NEW LOAN FACILITIES BY THE EXPORT-IMPORT BANK OF THE U.S. ( EX-IM BANK ) AND LIMITED SUPPLY OF SUITABLE, EX-IM BANK-GUARANTEED LOANS AVAILABLE FOR PURCHASE BY PEFCO IN THE SECONDARY MARKET. 2

5 LETTER TO SHAREOWNERS These limitations negatively impacted our operating results for our fiscal year Financial results for fiscal year 2018 were a net loss of $11.2 million, compared to a net loss in fiscal year 2017 of $3.0 million. Due to the financial results, the Board did not declare a dividend for fiscal year The reduced lending activity for fiscal year 2018, as noted above, resulted in 18 new credit facilities for PEFCO, split between the purchase of 3 longterm guaranteed loans in the secondary market for $295 million, and the commitment to finance 15 medium-term guaranteed loan facilities for an aggregate amount of $84 million and an average facility size of approximately $6 million. The limitations on Ex-Im Bank loan approvals arise from the lack of a sufficient number of confirmed board members to establish a voting quorum on the Ex-Im Bank Board of Directors. The implications of the continued lack of a voting quorum at the Ex-Im Bank Board are that new loan approvals by Ex-Im Bank under previouslyestablished delegated authority are capped at a maximum of $10 million per facility for a tenor of seven years or less. Thus, the limitation in approval authority restricts Ex-Im Bank s ability to provide important support for the export of capital goods, services, and infrastructure transactions. Currently, the Administration has four nominees for the Ex-Im Bank Board awaiting confirmation, including Kimberly Reed for the role as President. We consult with Ex-Im Bank frequently and remain hopeful of Senate confirmation of these nominees. IN SPITE OF THESE DIFFICULTIES, PEFCO TOOK THE INITIATIVE TO IMPLEMENT IMPORTANT ENHANCEMENTS TO OUR FUNDING CAPABILITIES, AND TO PROVIDE A STRONGER LIQUIDITY BASE AS PART OF OUR CORE MISSION TO FINANCE THE EXPORT OF U.S. GOODS AND SERVICES. In spite of these difficulties, PEFCO took the initiative to implement important enhancements to our funding capabilities, and to provide a stronger liquidity base as part of our core mission to finance the export of U.S. goods and services. In December 2017, we launched a new unsecured $2.5 billion Rule 144A / Regulation S Medium-term Notes Program with maturities up to five years. We issued $200 million of two-year 2.10% Medium-term Notes in December 2017, $300 million of 2.65% three-year Medium-term Notes in February 2018, and $300 million of Floating Rate, two-year Medium-term Notes in July 2018, with the proceeds of all three issues being used to reduce our outstanding commercial paper. The three issues received debt ratings from Fitch and Moody s of AA+ and AAA, respectively. We also developed a new Rule 144A/ Regulation S Collateralized Notes Program to provide us with additional liquidity to purchase Ex-Im Bank guaranteed loans and other loans and assets guaranteed as to principal and interest by other U.S. government agencies backed by the full faith and credit of the United States. The launch of the Collateralized Notes Program complements PEFCO s existing Secured Notes Program. In November 2018, we issued $200 million of secured 3.266%, three-year Collateralized Notes. These new funding initiatives provide PEFCO with a stronger liquidity base and financing flexibility for supporting our current and future lending requirements. In our forty-eighth year of operation, PEFCO continues to remain true to our core mission, as a private source of capital, to support the exports of U.S. goods and services, supplementing other forms of financing with our own privately-raised financing for loans guaranteed by Ex-Im Bank, and to a lesser extent loans guaranteed by other U.S. government agencies. PEFCO has evolved over the years to meet the needs of our customers, while being mindful of our broader role. We wish to recognize Samir Pandiri, who concluded his term as a director representing Bank of New York Mellon after serving since His service and insights on our Board contributed importantly to PEFCO s operations. We wish him all the best. We also welcome Diane Reyes, Group General Manager of HSBC, who was elected a new director at our September 2018 Board Meeting. We appreciate the dedicated work of the PEFCO staff over fiscal year Their efforts were critical to PEFCO s operations including the successful implementation of our new financing capabilities and of improved operations. We are grateful for the guidance of the PEFCO Board as well as for the continuing support of our shareowners, and the banks, trade finance firms and borrowers with whom we have had relationships over the past year. Finally, we appreciate the tireless efforts of our colleagues at Ex-Im Bank in supporting the exports of U.S. goods and services. Timothy C. Dunne President & Chief Executive Officer Richard S. Aldrich, Jr. Executive Chairman 3

6 BUSINESS YEAR IN REVIEW 4

7 BUSINESS YEAR IN REVIEW Committed to growing opportunities for America s Export Businesses WE ARE FOCUSED ON THE GROWTH OF U.S. EXPORTS BY HELPING OUR COUNTRY COMPETE, WE OPEN MORE MARKETS AND CREATE MORE OPPORTUNITIES TO GROW OUR ECONOMY. 5

8 BUSINESS YEAR IN REVIEW PEFCO S PROGRAMS HAVE ENABLED THE WORLD-WIDE EXPORT OF VARIOUS U.S. PRODUCTS. OUTSTANDING EXPORT LOANS GUARANTEED OR INSURED BY EX-IM BANK AND OPIC AS OF SEPTEMBER 30, 2018: OUTSTANDING LOANS BY PRODUCT WERE: (DOLLARS IN MILLIONS) Infrastructure 13 Telecommunication 33 Equipment 37 Small Business 163 Energy 435 Aircraft 4,161 TOTAL $4,842 OPIC EX-IM OUTSTANDING LOANS BY COUNTRY WERE: (DOLLARS IN MILLIONS) Great Britain 62 Ireland 336 Russian Federation 56 Norway 144 Kazakhstan 145 China 630 Republic of Korea 613 Mexico 227 Luxembourg 173 Italy 115 Turkey 286 Israel 71 Bangladesh 120 Other 336 Brazil 221 Angola 241 Saudi Arabia 54 Qatar 82 United Arab Emirates 182 India 402 Philippines 66 Australia 280 6

9 BUSINESS YEAR IN REVIEW PEFCO S NEW LOAN COMMITMENTS WERE $379 MILLION IN 2018, COMPARED TO NEW LOAN COMMITMENTS OF $165 MILLION IN LENDING PEFCO s new loan commitments were $379 million in 2018, compared to new loan commitments of $165 million in New commitments in Medium term Loan Programs were $84 million in 2018 and $98 million in EARNINGS PEFCO s net loss in 2018 was $11.2 million compared to net loss of $3.0 million in Net Financing Expense in 2018 was $1.8 million compared to Net Financing Income of $5.9 million in The average balances of both financing assets and liabilities decreased by $1.1 billion in The average financing revenue interest rate increased by 0.73% and the average financing expense interest rate increased by 0.83%. DIVIDEND PEFCO did not declare a dividend for the fiscal year ending September 30, Given the Export-Import Bank of the United States reauthorization and its Board quorum issues in fiscal 2018, PEFCO s Management believes that preservation of capital is in the best interest of PEFCO and its shareowners. No. of Loan Commitments Products Amounts (in millions) 1 AIRCRAFT $ PETROCHEMICAL MEDIUM-TERM $ 379 7

10 SUMMARY OF PEFCO S BUSINESS 8

11 SUMMARY OF PEFCO S BUSINESS PEFCO was incorporated on April 9, 1970 UNDER DELAWARE LAW AND IS PRINCIPALLY ENGAGED IN MAKING U.S. DOLLAR LOANS TO FOREIGN IMPORTERS TO FINANCE PURCHASES OF GOODS AND SERVICES OF UNITED STATES MANUFACTURE OR ORIGIN. PEFCO s shareowners include most of the major commercial banks involved in financing U.S. exports, industrial companies involved in exporting U.S. products and services, and financial services companies. PEFCO was established with the support of the United States Department of the Treasury and the Export-Import Bank of the United States ( Ex-Im Bank ) to assist in the financing of U.S. exports through the mobilization of private capital as a supplement to the financing already available through Ex-Im Bank, commercial banks and other lending institutions. Ex-Im Bank has cooperated in the operation of PEFCO through various agreements described under PEFCO s Relationship with Ex-Im Bank and in the Notes to Consolidated Financial Statements. Since all loans made by PEFCO are guaranteed or insured as to the due and punctual payment of principal and interest by Ex-Im Bank or other U.S. government institutions, such as the Overseas Private Investment Corporation ( OPIC ), whose obligations are backed by the full faith and credit of the United States, PEFCO relies upon this U.S. government support and does not make evaluations of credit risks, appraisals of economic conditions in foreign countries, or reviews of other factors in making its loans. 9

12 SUMMARY OF PEFCO S BUSINESS PEFCO S LENDING PROGRAMS Long-term Loan Programs Direct Loan Program Under the Direct Loan Program, PEFCO acts as the original lender making loans directly to borrowers (as opposed to buying loans made by other lenders) to finance their purchases of U.S. goods and services. All such loans benefit from Ex-Im Bank s comprehensive long-term guarantee to PEFCO, dated December 15, 1971, as amended (see PEFCO s Relationship with Ex-Im Bank ). PEFCO Direct Loans are available for transactions which have an Ex-Im Bank guaranteed value of $20 million or more and a repayment term of five years or more. The PEFCO Direct Loan Program is typically limited to borrowers seeking a fixed-rate of interest on the Ex-Im Bank guaranteed loans. Ex-Im Bank also allows PEFCO to make its Direct Loans available on a floating-rate basis to borrowers located in sub-saharan Africa and borrowers engaged in the purchase of environmental exports from the U.S. or exports from U.S. small business exporters. Long-term Commitments 2018 $ 295 MILLION 2017 $ 67 MILLION 2016 $ 268 MILLION The interest rates on Direct Loans (whether fixed or floating) are based on PEFCO s estimated cost of funds at the time the rate is calculated, taking into account the disbursement and repayment characteristics of the loan. PEFCO s estimated cost of funds is a function of the then current U.S. Treasury yield for a maturity similar to the average life of the loan being funded, plus the estimated margin over the Treasury yield required to place PEFCO Secured Notes with investors, warehousing and hedging costs, if any, and a modest margin for expenses, risk and return to shareholders. In the case of fixed-rate loans, PEFCO allows a great deal of flexibility with respect to the timing of the rate fixing. Borrowers are able to set forward rates in advance of any disbursement under the loan facility or, if they prefer, borrowers may elect to wait up to one year after final disbursement of the loan to set the fixed rate. Floating interest rates are set by determining a fixed spread to LIBOR, based on PEFCO s estimated cost of funds described above. PEFCO may also charge commitment fees calculated on the undisbursed and uncancelled amount of the loan commitment. Once the fixed rate has been established, a borrower may only cancel or prepay a portion of a loan or loan commitment by paying PEFCO a make-whole fee equal to the present value of the reinvestment loss, if any, that would be incurred by PEFCO as a result of such prepayment or cancellation. Secondary Loan Program The purpose of the Secondary Loan Program is to provide liquidity to lenders participating in the Ex-Im Bank guaranteed loan market. PEFCO will support lenders making long-term Ex-Im Bank guaranteed loans by buying such loans from the originating lender. As with the Direct Loan Program, the rates (yields) at which PEFCO is willing to buy such loans will be a function of PEFCO s estimated cost of funds at the time of such purchase. Lenders are also able to obtain commitments from PEFCO to purchase loans in the future (in advance of disbursement of such loan by the originating lender). Moreover, by 2009 agreement with Ex-Im Bank, PEFCO is no longer limited to purchasing floating-rate loans in connection with environmental transactions, small business exporters and sub-saharan PEFCO DIRECT LOANS ARE AVAILABLE FOR TRANSACTIONS WHICH HAVE AN EX-IM BANK GUARANTEED VALUE OF $20 MILLION OR MORE AND A REPAYMENT TERM OF FIVE YEARS OR MORE. 10

13 SUMMARY OF PEFCO S BUSINESS borrowers. PEFCO is now free to purchase both floating and fixed-rate long-term loans for which Ex- Im Bank gave its guarantee commitment without restriction. In fiscal year 2013, PEFCO developed with Ex-Im Bank the Secondary Market Long-term Loan Purchase Program (SMLTPP) to facilitate the development of an active secondary market in long-term Ex-Im Bank guaranteed loans. To be eligible for the purchase under SMLTPP, the loan must be fully disbursed and have been on the books of the originating lender for at least one year, determined from the date of the first disbursement under the facility sold. In addition, the selling institution will sign a representation stating that they are active in the business of originating Ex-Im Bank guaranteed loans, and will continue to generate such loans for their own account. PEFCO has agreed to set aside up to $250 million of lending capacity per quarter for an aggregate annual amount of up to $800 million. Pricing is subject to PEFCO pricing models for fixed-rate loans and current PEFCO spread quotations for floating-rate loans. Medium-term Loan Programs These programs are a dependable source of liquidity for lenders using Ex-Im Bank Medium-term Guarantee Programs. The lender is always our customer; PEFCO does not finance exporters directly. The loans must be covered against non-payment under a guarantee by Ex-Im Bank. PEFCO will only purchase the amount covered by the Ex-Im Bank guarantee, and not the uncovered portion. Under both programs, PEFCO will purchase loans from lenders who have demonstrated an understanding of, and ability to work with Ex-Im Bank guarantee programs. Loan amount, exporter size, borrower s country, and the underlying item financed are Medium-term Commitments 2018 $ 84 MILLION 2017 $ 98 MILLION 2016 $ 24 MILLION not factors in our decision to purchase. All loans are purchased by PEFCO on a non-recourse basis. While defaulted loans must and will be assigned to Ex-Im Bank upon its payment of a claim, performing loans are held by PEFCO in its portfolio to maturity. By selling to PEFCO, a lender achieves its financial objectives improved profitability, removal from the balance sheet of low-yielding assets, a freeing-up of capacity for borrowers, and reduced loan portfolio size while maintaining its lending relationship with the borrower. PEFCO offers three mediumterm secondary market facilities. Guaranteed Note Facility: PEFCO purchases medium-term loans guaranteed against non-payment under an Ex-Im Bank medium-term guarantee ( ECP-MGA ). Interest rates can be floating or fixed. Fixed rates can be set in advance of the PEFCO purchase date. Discount Facility: PEFCO offers a special program under the Guaranteed Note Facility used for guaranteed loans requiring a fixed interest rate to be set prior to shipment of the items. Once set, the fixed interest is held constant until the final disbursement, even when the note has multiple disbursements over many months, without payment of an up-front fee. Guaranteed Lease Facility: PEFCO purchases medium-term leases guaranteed against non-payment under an Ex-Im Bank ECP-MGA. Interest rates can be floating or fixed. Fixed rates can be set in advance of the PEFCO purchase date. 11

14 SUMMARY OF PEFCO S BUSINESS Other features of PEFCO Medium-term Facilities: All purchases are governed by a master note purchase agreement. PEFCO will fund any note structure acceptable to Ex-Im Bank. PEFCO will purchase single notes or portfolios, new notes or partially repaid notes, single-disbursement or multiple-disbursement notes, financial leases. Except for the Discount Facility, the lender may retain responsibility for servicing the loan and maintaining the Ex-Im Bank guarantee or policy. PEFCO holds the original note. For the Discount Facility, PEFCO always assumes responsibility for collecting payments and maintaining the Ex-Im Bank guarantee. PEFCO holds the original note. PEFCO S FUNDING ACTIVITIES PEFCO supports the financing of the lending activity through four separate funding programs, covering both short-term financing requirements and term debt issuance in unsecured and secured programs. Historically, PEFCO managed shortterm funding needs through the issuance of commercial paper. Longer-term funding requirements were funded through the issuance of notes under the Secured Notes Program, backed by a pledge of guaranteed assets and an Ex-Im Bank guarantee on the debt coupons. In fiscal year 2018, PEFCO complimented these two existing funding programs with the launch of the new unsecured Medium-term Notes Program and development on establishing the Collateralized Notes Program scheduled to launch in early fiscal Commercial Paper Program PEFCO raises short-term liquidity to finance loan commitments through the issuance of commercial paper. Issuance in U.S. dollars is executed domestically under 3(a)3 and 4(2) exemptions, as well as through an offshore facility. As of September 30, 2018, PEFCO had $912 million in commercial paper outstanding, and received short-term ratings of P-1 by Moody s and F1+ by Fitch. Issuance of commercial paper is authorized under a limit approved by the PEFCO Board. The commercial paper programs are backed by three syndicated bank credit facilities. In 2018, PEFCO established a new $640 million 364-day facility maturing in May 2019, and established a new $160 million three year facility maturing in May In addition, PEFCO has an existing $200 million three year facility maturing in May The combined total of all three facilities is $1 billion. Of the ten lenders across the three credit facilities, nine are shareholders of PEFCO. The credit agreements contain a number of covenants (with customary exceptions), including a covenant that PEFCO comply with its contractual commitments with Ex-Im Bank. As of September 30, 2018, there were no amounts outstanding under any of the credit agreements. In addition, there were no amounts drawn under any of the credit agreements during fiscal year PEFCO manages the liquidity and interest rate exposures arising from loan assets and unfunded loan commitments through the combination of sourcing liquidity from the funding programs interest rate hedging strategies incorporating the use of interest rate derivatives. This approach allows for targeting the proper liquidity profile, while seeking to control the exposure to market fluctuations in interest rates. For fixed-rate loan commitments, PEFCO hedges the loan pricing at the time that a borrower accepts a fixed-rate loan offer, either through specific hedging actions or within the context of managing the interest rate risk in the overall book. Certain dealers of PEFCO commercial paper, certain underwriters of PEFCO Secured Notes, Medium-term Notes, and Collateralized Notes, and certain participants in the syndicated bank credit facilities are shareowners (or their affiliates are shareowners) of PEFCO. See Note 12, Related Party Transactions, for more information. 12

15 SUMMARY OF PEFCO S BUSINESS Secured Notes Program Established in 1975, the Secured Note Program is PEFCO s original term funding program. Issuance of Secured Note series is offered through underwriters under a 3(a)2 exemption. The Secured Note series outstanding are backed by two forms of enhancements for the benefit of the noteholders. First, the principal repayments for the Secured Notes are backed by pledged assets, including guaranteed loans backed by Ex-Im Bank under the 1971 Guarantee Agreement between Ex-Im Bank and PEFCO, and investment securities explicitly backed by the full faith and credit of the U.S. Second, the coupon interest paid on the Secured Note Program is backed by an Ex-Im Bank guarantee, as provided in Article 2 of the Guarantee And Credit Agreement. Annual issuance of Secured Notes is authorized under a limit approved by the PEFCO Board and the Ex-Im Bank Board. Since inception, PEFCO has issued $17.6 billion aggregate principal amount of Secured Notes, of which $4.3 billion aggregate principal amount were outstanding at September 30, 2018, currently rated Aaa by Moody s Investor Service and AAA by Fitch Ratings on the long-term Issuer Default Rating for PEFCO. Medium-term Notes Program During fiscal year 2018, PEFCO established the new Mediumterm Notes Program to augment the commercial paper issuance with a new unsecured funding program for tenors up to five years. Issuance of Medium-term Notes is sold pursuant to Rule 144A and Regulation S to qualified investors. Issuance is authorized under a $2.5 billion limit for the program. In addition, the aggregate amount outstanding of Medium-term Notes and commercial paper is also subject to a $2.5 billion combined limit. As of September 30, 2018, PEFCO had $850 million in Medium-term Notes outstanding. During fiscal year 2018, PEFCO issued three separate series sold through dealers in maturities of 2 years and 3 years, including a three year floater issued in July Issuance under the Medium-term Notes Program is currently rated Aaa by Moody s Investor Service and AA+ by Fitch Ratings. FOR LENDERS NOT ABLE TO MAKE A LOAN DIRECTLY, PEFCO WILL STAND-IN AS DIRECT LENDER ON BEHALF OF THE ORIGINATING PARTY. 13

16 SUMMARY OF PEFCO S BUSINESS SINCE INCEPTION, PEFCO HAS ISSUED $17.6 BILLION AGGREGATE PRINCIPAL AMOUNT OF SECURED NOTES, OF WHICH $4.3 BILLION AGGREGATE PRINCIPAL AMOUNT WERE OUTSTANDING AT SEPTEMBER 30, Collateralized Notes Program During fiscal 2018, PEFCO undertook the development of the new Collateralized Notes Program to complement the existing capabilities of the Secured Note Program and both unsecured funding programs. Issuance of Collateralized Notes is sold pursuant to Rule 144A and Regulation S to qualified investors. Collateralized Notes issuance is authorized under a limit approved by the PEFCO Board, and subject to approval by Ex-Im Bank. Outstanding Collateralized Notes benefit from two forms of enhancement. First, PEFCO pledges loans backed by U.S. Government Guarantees, and investments in securities benefiting from the full faith & credit of the U.S. Loan assets included in the collateral pool will primarily be guaranteed loans backed by Ex-Im Bank that are purchased in the secondary market. Second, the program benefits from an interest reserve account covering six months of coupon interest due on the Collateralized Notes series outstanding. PEFCO completed the development of the Collateralized Notes Program in October 2018, and launched the inaugural series in November Issuance under the Collateralized Notes Program is currently rated Aaa by Moody s Investor Service and AAA by Fitch Ratings. 14

17 SUMMARY OF PEFCO S BUSINESS PEFCO S RISK MANAGEMENT POLICIES PEFCO manages risk exposures for interest rate risk, liquidity and counterparty risk using guidelines approved by its Board of Directors. Management reports twice a year to the Risk Policy Committee of the Board. For interest rate risk, Management routinely measures the net present value and duration of interest-sensitive assets and liabilities and maintains current schedules which show asset/liability mismatches and simulation of future income. Management will not place at risk a 100 basis point movement in interest rates in more than 10% of the pre-tax net present value of capital. Management may use derivative contracts, such as interest rate swaps, in fair value and cash flow hedge strategies as part of the process to mitigate risk exposure to changes in market interest rates. However, Management will not use swaps or other derivative financial instruments for speculative purposes. As a financial institution, PEFCO has been required to clear all swap trades through a centralized clearinghouse since June As of September 30, 2018, over 95% of the derivatives portfolio are cleared through the Chicago Mercantile Exchange. As a position limit on investments, Management will not allow non-core business investments (those investments that are not required to cover secured note installments in the trust estate and that are unrelated to the secured note program) with a maturity of more than 90 days to exceed $400 million and will mark these investments to market daily. To mitigate liquidity risk, the amount of short-term funding due to mature within a two-week period, including commercial paper, will not exceed the unutilized portion of the credit facility. In addition, a balance of unencumbered assets will be maintained to equal the level of outstanding unsecured borrowings less the unutilized portion of the credit facility. For managing capital leverage, Management operates under a leverage ratio limit that caps guaranteed assets to shareowners equity to a level no greater than 75 to 1. PEFCO has had a long and significant relationship with the Export-Import Bank of the United States since its inception, providing liquidity support for certain of its guarantee financing facilities. These arrangements are set forth in various agreements that are described herein. PEFCO HAS HAD A LONG AND SIGNIFICANT RELATIONSHIP WITH THE EXPORT-IMPORT BANK OF THE UNITED STATES SINCE ITS INCEPTION, PROVIDING LIQUIDITY SUPPORT FOR CERTAIN OF ITS GUARANTEE FINANCING FACILITIES. 15

18 PEFCO S RELATIONSHIP WITH EX-IM BANK Under the terms of a Guarantee Agreement, DATED DECEMBER 15, 1971, AS AMENDED, BETWEEN PEFCO AND EX-IM BANK, DUE AND PUNCTUAL PAYMENT OF THE PRINCIPAL OF AND INTEREST ON ALL FOREIGN IMPORTER NOTES EVIDENCING LOANS MADE BY PEFCO WITH THE APPROVAL OF EX-IM BANK WILL BE FULLY AND UNCONDITIONALLY GUARANTEED BY EX-IM BANK. 16

19 PEFCO S RELATIONSHIP WITH EX-IM BANK 17

20 PEFCO S RELATIONSHIP WITH EX-IM BANK PEFCO S RELATIONSHIP WITH EX-IM BANK Guarantee Agreement Dated 12/15/1971 Under the terms of a Guarantee Agreement, dated December 15, 1971, as amended, between PEFCO and Ex-Im Bank, due and punctual payment of principal and interest on all foreign importer notes ( Guaranteed Importer Notes ) evidencing loans made by PEFCO with the approval of Ex-Im Bank will be fully and unconditionally guaranteed by Ex-Im Bank. At its option, PEFCO (or a trustee acting for the benefit of noteholders with which PEFCO may pledge Guaranteed Importer Notes under the Indenture, dated as of June 15, 1975, as supplemented and amended (the Indenture ), among PEFCO, Ex-Im Bank and The Bank of New York Mellon, as Trustee (the Trustee ) may, after an event of default under any loan agreement pursuant to which PEFCO shall have acquired any Guaranteed Importer Note, elect (i) to have Ex-Im Bank service such Guaranteed Importer Note by continuing the payment of interest and principal in accordance with the terms thereof or (ii) to accelerate the maturity of such Guaranteed Importer Note and have Ex-Im Bank pay the entire amount of such Guaranteed Importer Note plus accrued interest to the date of payment. If PEFCO or the Trustee should exercise the option described in clause (ii) of the preceding sentence, Ex-Im Bank has the right to substitute another Guaranteed Importer Note with a yield to PEFCO at least equal to the yield on, and with approximately the same remaining stated maturities as, the Guaranteed Importer Note in default. The Indenture provides that any Guaranteed Importer Note substituted by Ex-Im Bank must have remaining stated maturities which, together with the stated maturities of the other collateral then subject to the lien of the Indenture, will be sufficient to ensure that, before the dates of any mandatory payments of principal on all Secured Notes outstanding under the Indenture, the Trustee will be provided with cash sufficient to make such payments. In consideration of Ex-Im Bank s guarantee of the Guaranteed Importer Notes, a one-time front-end exposure fee is payable to Ex-Im Bank by PEFCO at a rate determined by Ex-Im Bank. Such fee is normally paid directly to Ex-Im Bank by the borrower on behalf of PEFCO. Under the terms of a Guarantee Fee Guarantee Agreement dated as of September 15, 1988 between PEFCO and Ex-Im Bank, Ex-Im Bank guarantees PEFCO s reimbursement by borrowers of all amounts of guarantee fees paid by PEFCO to Ex-Im Bank. The Indenture provides that no failure by PEFCO to pay the required guarantee fee will affect Ex-Im Bank s obligation under any Guaranteed Importer Note subject to the lien of the Indenture. In September 2008, PEFCO entered into an agreement with Ex-Im Bank pursuant to which certain loans purchased by PEFCO that had been guaranteed by Ex-Im Bank under the Ex-Im Bank Master Guarantee Agreement would be eligible to be approved by Ex-Im Bank for coverage under the 1971 Guarantee Agreement and, as a result, could then be eligible to be pledged as collateral in connection with issuances of Secured Notes Guarantee And Credit Agreement In 1971, in order to assist PEFCO in its objective of mobilizing private capital to finance U.S. exports, Ex-Im Bank entered into a Guarantee and Credit Agreement (the Agreement ) with PEFCO. Pursuant to the Agreement, among other things, Ex-Im Bank agreed, when requested by PEFCO, to guarantee the due and punctual payment of interest on debt obligations of PEFCO approved for issuance by Ex-Im Bank, which currently are PEFCO s Secured Notes. The Agreement also provides that Ex-Im Bank will make any required payments under its interest guarantees directly to any trustee acting for the benefit of the holders of debt obligations so guaranteed, that any claims Ex-Im Bank may have against PEFCO for any payments made by Ex-Im Bank under such guarantees will not be collected from assets pledged to secure such obligations, unless and until the holders thereof have been paid in full, and that Ex-Im Bank will enter into an agreement with any such trustee to evidence the foregoing understandings. The Indenture contains provisions of the nature described in the foregoing sentence. A semi-annual guarantee fee on the total interest accrued by PEFCO during the preceding semi-annual period on securities on which interest payments have been guaranteed by Ex-Im Bank is payable to Ex-Im Bank under the Agreement. Such fee is computed at the rate of 1/4 of 1% on the first $10,000,000 of such interest expense, 3/16 of 1% on the next $10,000,000 of such interest expense and 1/8 of 1% on the balance, if any, of such interest expense. If Ex-Im Bank makes any payments pursuant to its guarantees of interest on PEFCO s Secured Notes, the Agreement requires PEFCO, if its net worth exceeds 25% of its paid-in and callable capital, immediately to apply (i) cash and securities held by PEFCO and not pledged to secure any other obligations of PEFCO plus (ii) the aggregate amount which PEFCO can call pursuant to subscription agreements with its shareowners to reimburse Ex-Im Bank for such payments. Moreover, if PEFCO has net income in any subsequent semiannual period, it must apply the amount of such net income to repay Ex-Im Bank for any unreimbursed payments made by Ex-Im Bank under its guarantees of interest on PEFCO debt obligations. 18

21 PEFCO S RELATIONSHIP WITH EX-IM BANK IN 1971, IN ORDER TO ASSIST PEFCO IN ITS OBJECTIVE OF MOBILIZING PRIVATE CAPITAL TO FINANCE U.S. EXPORTS, EX-IM BANK ENTERED INTO A GUARANTEE AND CREDIT AGREEMENT WITH PEFCO. 19

22 PEFCO S RELATIONSHIP WITH EX-IM BANK Finally, any amounts paid by Ex-Im Bank pursuant to its guarantees of interest must be repaid by PEFCO within one year after payment in full of the last maturing PEFCO debt obligation on which interest is guaranteed by Ex-Im Bank. Amounts paid by Ex-Im Bank under its guarantee of interest will bear interest at the prevailing rate of interest charged by Ex-Im Bank on direct loans made in the ordinary course of business on the date of such payment by Ex-Im Bank. Such interest is to be payable semi-annually. The Agreement gives Ex-Im Bank a broad measure of supervision over PEFCO s major financial management decisions. In particular, the Agreement requires the approval of Ex-Im Bank before PEFCO can issue certain debt obligations, make direct loans guaranteed by Ex-Im Bank, purchase its longterm debt obligations prior to their originally stated maturity date, invest its surplus funds in assets other than Ex-Im Bank approved investments, declare or pay dividends on its capital stock, transfer all or substantially all of its assets or engage in any business other than the financing of exports of U.S. goods and services. Prior consent of Ex-Im is required for PEFCO to withdraw any excess collateral or substitute for any items previously collateralized under the Secured Notes Program. Additionally, the Agreement gives Ex-Im Bank the right to have representatives present at all meetings of PEFCO s Board of Directors and the right to receive information as to PEFCO s budgets, financial condition and operating results. The Agreement, which, as originally executed, was scheduled to terminate on December 31, 1995, has been extended by agreement between Ex-Im Bank and PEFCO to December 31, PEFCO may also terminate the Agreement as of December 31 in any year on 60 days prior written notice if it is not indebted to Ex-Im Bank at the time. No termination will affect any then outstanding guarantees of Ex-Im Bank or PEFCO s obligations to pay the guarantee fee on, or to reimburse Ex-Im Bank for any payment by it under, any such guarantee. Under the Agreement, Ex-Im Bank has agreed that no failure by PEFCO to pay the required guarantee fee will affect Ex-Im Bank s obligations under any outstanding guarantees and that Ex-Im Bank will not exercise any right to terminate, cancel or rescind the Agreement so long as any debt obligations of PEFCO are held by persons other than Ex-Im Bank. THE AGREEMENT GIVES EX-IM BANK A BROAD MEASURE OF SUPERVISION OVER PEFCO S MAJOR FINANCIAL MANAGEMENT DECISIONS. The Agreement provides that Ex-Im Bank will, if necessary to meet its obligation, make payments which may be required under its guarantee of interest on all notes outstanding under the Indenture, and to the extent that funds are available in accordance with Section 6 of the Export-Import Bank Act of 1945, as amended, apply to the Secretary of the Treasury for a loan or loans in amounts which, together with other funds available to Ex-Im Bank for such purpose, shall be sufficient to make such payments. Except for the Guarantee Agreement and the Guarantee and Credit Agreement, PEFCO s guarantees and insurance policies with Ex-Im Bank have additional requirements that must be observed in order to receive payment under the relevant guarantee or policy. Various other provisions governing the relationship between Ex-Im Bank and PEFCO are contained in the Agreement, a copy of which is on file and available for inspection during normal business hours at the offices of PEFCO. Over the years, Ex-Im Bank s statutory authority to exercise its functions has been limited to specified periods, which have been extended by Congressional action from time to time. The Export-Import Bank Reform and Reauthorization Act of 2015 (PL ) extended Ex-Im Bank s corporate existence through September 30, If the corporate existence of Ex-Im Bank shall terminate or have been terminated, under the provisions of the Export-Import Bank Act of 1945, as amended, such a termination of the corporate existence of Ex-Im Bank would have no effect on Ex-Im Bank s guarantee of principal and interest on the Guaranteed Importer Notes, and no effect on Ex-Im Bank s guarantee of interest on the outstanding Secured Notes. 20

23 PEFCO S RELATIONSHIP WITH EX-IM BANK 21

24 MANAGEMENT S DISCUSSION & ANALYSIS OPERATIONS The following discussion should be read in conjunction with PEFCO s Financial Statements and the Notes thereto found elsewhere in this report. PEFCO s mission is to assist in the financing of U.S. exports by mobilizing private capital as a supplement to the financing already available through the Export-Import Bank of the United States (Ex-Im), commercial banks and other lending institutions. PEFCO accomplishes this objective primarily by purchasing medium and long term debt obligations issued by foreign importers of U.S. goods and services which are guaranteed or insured as to the timely payment of principal and interest by Ex-Im Bank, or by other U.S. government institutions whose obligations are backed by the full faith and credit of the United States, or by purchasing from commercial bank lenders participating interests in such obligations. PEFCO finances these purchases through the sale of its own securities to investors in private transactions. PEFCO also assists small businesses in financing U.S. exports and provides support for certain securitized, guaranteed financing facilities of Ex-Im Bank. Since PEFCO s creation, the volume of its export loan business has been subject to the initiation of financing transactions involving PEFCO by commercial banks and other lending institutions (including the shareowners of PEFCO), the approval by Ex-Im Bank of PEFCO s participation in each such transaction, the volume of U.S. exports, and the requirements and policies of Ex-Im Bank with respect to the financing of those exports. EX-IM BANK S CHARTER There has been significant debate in the U.S. Congress surrounding the reauthorization of the charter of the Export- Import Bank with opinions expressed for reauthorizing the original charter, reauthorizing under a revised charter, and permanent dissolution. On June 30, 2015, Congress recessed without reauthorizing Ex-Im s charter, thereby allowing the charter to lapse effective July 1. Ex-Im s board of directors and employees were prohibited from approving any new authorizations, engaging in business development or other prohibited activities. During the period of the lapse, Ex-Im continued to monitor and manage its existing portfolio and met its continuing legal obligations under its charter. On December 4, 2015, President Barrack Obama signed into law the Export-Import Bank Reform and Reauthorization Act of 2015 reauthorizing Ex-Im through September 30, Since the reauthorization, Ex-Im has not had the requisite number of directors appointed by Congress to form the necessary quorum to approve loans greater than $10 million. This disruption in Ex-Im s charter has had a direct impact on PEFCO over this period, as Ex-Im, through certain agreements with PEFCO, exerts a broad measure of supervision over PEFCO s major financial management decisions, such as issuing certain debt obligations, making direct loans guaranteed by Ex- Im, investing surplus funds in assets other than Ex-Im approved investments or engaging in any business other than the financing of exports of U.S. goods and services. LIQUIDITY AND CAPITAL RESOURCES The principal source of capital during the year were funds generated from the net issuance of PEFCO s Short- and Medium-term notes. In fiscal 2018, PEFCO issued $850 million of Medium-term notes. There were no Long-term Secured notes issuances in fiscal As of September 30, 2018, PEFCO has approximately $5.9 billion of total obligations, of which approximately $909 million (15%) were short-term, $843 million (14%) were medium-term, and $4,193 million (71%) were long-term. As of September 30, 2018, the Secured Notes Program, which includes portions due within one year, had maturities of $1,000 million in 2019, $725 million in 2020, zero in 2021, $1,000 million in 2022, $400 million in 2023 and $1,150 million thereafter. As of September 30, 2018, the Medium-term Notes Program has scheduled maturities of zero in 2019, $550 million in 2020, and $300 million in During the year ended September 30, 2018, PEFCO issued no additional common shares. PEFCO had total Shareowners Equity of $130.2 million, total capitalization (calculated as the sum of total debt and total Shareowners Equity) of $6.1 billion and a total debt to capitalization ratio of 98.0%. On May 2, 2018, PEFCO entered into a new 364 day $640 million revolving credit facility and a new $160 million 3-year revolving credit facility. Combined with an existing $200 million revolving credit facility maturing in 2020, PEFCO s credit facilities total $1.0 billion. The credit agreements contain a number of covenants, including a negative pledge covenant and a covenant that PEFCO will comply with its contractual commitments with Ex- Im Bank. As of September 30, 2018, there were no amounts outstanding under these credit facilities. 22

25 MANAGEMENT S DISCUSSION & ANALYSIS The following table is an analysis of Financing Revenue, Financing Expense, and Net Financing Income (Expense) for the years ended September 30, (In thousands) Average Balance Average Rate Interest Revenue Average Balance Average Rate Interest Revenue Average Balance Average Rate Interest Revenue Financing Revenue Interest Revenue Export loans guaranteed or insured by Ex-Im Bank: Primary Long-term Loan Program Fixed-rate $ 3,031, % $ 74,694 $ 3,611, % $ 60,497 $ 4,241, % $ 48,945 Floating-rate 62, % 1,531 79, % 1,437 96, % 1,218 Secondary Long-term Loan Program Fixed-rate 355, % 10, , % 13, , % 12,437 Floating-rate 1,675, % 40,933 1,857, % 30,178 2,043, % 22,859 Short & Medium-term Programs Medium-term Programs Medium-term 115, % 3, , % 2, , % 2,561 Working Capital & Short-term Insurance 1, % 33 3, % 64 23, % 503 Loans guaranteed by OPIC Long-term 6, % , % , % 422 Medium-term 42, % 1,220 57, % 1,256 74, % 1,299 Loans 5,287, % 132,039 6,378, % 109,713 7,390, % 90,244 Investment securities 1,037, % 15,472 1,096, % 8, , % 4,667 Cash equivalents & Time deposits 311, % 5, , % 2, , % 826 Total $ 6,635, % $ 152,606 $ 7,718, % $ 121,096 $ 8,372, % $ 95,737 Commitment and prepayment fees 1,530 3, Financing Revenue $ 154,136 $ 124,571 $ 96,665 Financing Expense Interest Expense Long-term Notes $ 4,767, % $ 118,708 $ 5,726, % $ 94,686 $ 6,656, % $ 72,941 Medium-term Notes 448, % 10,987 Short-term Notes 1,299, % 22,687 1,877, % 20,280 2,171, % 11,765 Total $ 6,514, % $ 152,382 $ 7,603, % $ 114,966 $ 8,827, % $ 84,706 Commitment and other fees 3,585 3,732 4,167 Financing Expense $ 155,967 $ 118,698 $ 88,873 Net Financing Income (Expense) $ (1,831) $ 5,873 $ 7,792 23

26 MANAGEMENT S DISCUSSION & ANALYSIS 2018 COMPARED TO 2017 PEFCO s Net Loss for 2018 was $11.2 million compared to a Net Loss of $3.0 million in The increase in the reported Net Loss was primarily the result of a $7.7 million decrease in Net Financing Income. Total Financing Revenue increased by $29.6 million; however the increase in Total Financing Expense amounted to $37.3 million, resulting in the decrease in Net Financing Income. PEFCO had a provision for loan losses of $497 thousand in General and administrative expenses were down slightly in 2018 to $10.0 million from $10.3 million in Total Financing Revenue Total Financing Revenue is composed of interest income on loans, investment securities available for sale, cash equivalents and time deposits and also includes commitment and other fees earned. In addition, any gains recognized on the prepayment of a loan are reported as part of Total Financing Revenue. Interest income on loans is net of interest expense on fair value hedges, as well as ineffectiveness gains or losses related to fair value hedge relationships on loans. For the year ended September 30, 2018, Total Financing Revenue increased by $29.6 million to $154.1 million from $124.6 million in Ineffectiveness losses on a portion of the Company s fair value hedge relationships amounted to $106 thousand in 2018 compared to ineffectiveness gains of $469 thousand in The primary reason for the increase in Total Financing Revenue was attributable to an increase in portfolio yield. Average loan volume decreased by $1.1 billion compared to 2017 and the average yield increased by 78 basis points. Interest on investment securities available for sale increased by $6.8 million in fiscal 2018 from $8.6 million in fiscal 2017 due to a decrease in average volume of $59 million offset by a 70 basis point increase in yield. Interest on cash equivalents and time deposits increased year over year by $2.4 million to $5.1 million largely due to an increase in yield of 52 basis points and a increase in average volume of $67 million. The overall average balance and yield of the lending portfolio was $5,287 million and 2.50% in 2018 (inclusive of net hedge ineffectiveness gains and losses; 2.50% without) compared with $6,378 million and 1.72% in 2017 (inclusive of net hedge ineffectiveness; 1.71% without). PEFCO utilizes interest rate swap contracts to hedge certain fixed-rate loans and accounts for these as fair value hedges. The net interest expense on these fair value hedges reported as an adjustment of interest income on fixed-rate loans was $14.8 million in 2018 and $55.3 million in The available for sale investment securities portfolio had an average balance and yield of $1,037 million and 1.49% in 2018 compared with $1,096 million and 0.79% in The cash equivalent and time deposit portfolio had an average balance and yield of $311 million and 1.64% in 2018 compared to an average balance and yield of $244 million and 1.12% in Commitment and prepayment fees amounted to $1.5 million in 2018 compared to $3.5 million in It is PEFCO s policy to permit borrowers to prepay loans only if the borrower makes PEFCO whole for the economic loss incurred as a result of such payment. In 2018, there were prepayment gains of $1.6 million from 9 borrowers compared to prepayment gains of $3.5 million from 2 borrowers in Commitment and other fees amounted to $56 thousand in 2018 compared to $10 thousand in The negative balance was due to price alignment interest of $204 thousand in Total Financing Expense Total Financing Expense is comprised of interest on short-term and long-term notes, amortization of debt issuance costs, and commitment and other fees incurred. Interest expense on long-term notes is net of interest income on fair value hedges. For the year ended September 30, 2018, Total Financing Expense increased to $156.0 million from $118.7 million in The reason for the increase in Total Financing Expense was primarily attributable to higher cost of funds in Short-term interest rates (LIBOR) are the basis for pricing the short-term notes issued by PEFCO while long-term interest rates (Treasury Notes) are the basis for pricing long-term debt issued by PEFCO. The average balance and effective costs for Long-term debt were $5,216 million and 2.49% in 2018 compared to $5,726 million and 1.65% in The average balance and effective cost of the Short-term Notes was $1,299 million and 1.75% in 2018 compared to $1,877 million and 1.08% in PEFCO utilizes interest rate swap contracts to hedge certain long-term debt and accounts for these contracts as fair value hedges. The net interest income on the fair value hedges of the long-term debt reported as an adjustment to interest expense was $18.0 million in fiscal 2018 and $69.0 million in fiscal Amortization of debt issuance costs amounted to $3.1 million in 2018 and $3.3 million Commitment and other fees paid in 2018 and 2017 amounted to $3.6 million and $3.7 million, respectively. 24

27 MANAGEMENT S DISCUSSION & ANALYSIS Net Financing Income (Expense) PEFCO s Net Financing Expense was $1.8 million in 2018 compared to Net Financing Income of $5.9 million in Net margin amounted to negative 4 basis points in 2018 (asset yield of 2.30% less interest cost of 2.34%) compared to positive 6 basis points in 2017 (asset yield of 1.57% less interest cost of 1.51%). Net Securities Gains In 2018, net securities transactions, the result of sales on investment securities available for sale, produced a net loss of $3 thousand, compared to a net loss of $54 thousand in General and Administrative Expenses The $0.3 million decrease is due to improvements of $0.8 million in Compensation and Benefits partially offset by increased Administrative costs ($0.1 million) and Professional fees ($0.4 million). Income Tax Benefit The Income tax benefit in 2018 was $1.1 million, the result of a $2.6 million tax benefit from the pre-tax operating loss of $12.3 million and a one-time tax provision for the write-down of net deferred tax assets of $1.5 million. By comparison the Income tax benefit in 2017 was $1.5 million on a pre-tax operating loss of $4.5 million. PEFCO s effective tax rate was 8.9% in 2018 and 33.9% in The change in the reported effective tax rate was due to the reduction in the U.S. statutory rate (34% to 21%) and an adjustment to net deferred tax assets for said tax reduction. Comprehensive Loss For the years ended September 30, 2018 and 2017, PEFCO s Comprehensive loss was $13.0 and $4.4 million, respectively. The Comprehensive loss for 2018 included a net loss from operations of $11.2 million, unrealized losses on investment securities available for sale, net of taxes, of $2.7 million and pension and post-retirement valuation adjustments, net of taxes, of $0.9 million. The Comprehensive loss for 2017 included a net loss from operations of $3.0 million, unrealized losses on investment securities available for sale, net of taxes, of $1.9 million and pension and post-retirement valuation adjustments, net of taxes, of $0.5 million. 25

28 INDEPENDENT AUDITORS REPORT TO THE BOARD OF DIRECTORS AND SHAREOWNERS OF PRIVATE EXPORT FUNDING CORPORATION: We have audited the accompanying financial statements of Private Export Funding Corporation (the Company ), which comprise the statements of financial condition as of September 30, 2018 and 2017, and the related statements of operations, comprehensive loss, changes in shareowners equity, and cash flows for each of the three years in the period ended September 30, 2018, and the related notes to the financial statements. We also have audited the Company s internal control over financial reporting as of September 30, 2018, based on the criteria established in the Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management s Responsibility for the Financial Statements and Internal Control over Financial Reporting Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of effective internal control over financial reporting relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Management is also responsible for its assessment about the effectiveness of internal control over financial reporting, included in the accompanying Management s Report on Internal Control over Financial Reporting. Auditors Responsibility Our responsibility is to express an opinion on these financial statements and an opinion on the Company s internal control over financial reporting based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement and whether effective internal control over financial reporting was maintained in all material respects. An audit of financial statements involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit of financial statements also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by Management, as well as evaluating the overall presentation of the financial statements. An audit of internal control over financial reporting involves performing procedures to obtain audit evidence about whether a material weakness exists. The procedures selected depend on the auditor s judgment, including the assessment of the risks that a material weakness exists. An audit of internal control over financial reporting also involves obtaining an understanding of internal control over financial reporting and testing and evaluating the design and operating effectiveness of internal control over financial reporting based on the assessed risk. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Definition and Inherent Limitations of Internal Control over Financial Reporting An entity s internal control over financial reporting is a process effected by those charged with governance, management, and other personnel, designed to provide reasonable assurance regarding the preparation of reliable financial statements in accordance with accounting principles generally accepted in the United States of America. An entity s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and those charged with governance; and (3) provide reasonable assurance regarding prevention, or timely detection and correction, of unauthorized acquisition, use, or disposition of the entity s assets that could have a material effect on the financial statements. 26

29 INDEPENDENT AUDITORS REPORT Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Private Export Funding Corporation as of September 30, 2018 and 2017, and the results of its operations and its cash flows for the three years then ended in accordance with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2018, based on the criteria established in the Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. December 11, 2018 New York, New York 27

30 STATEMENTS OF FINANCIAL CONDITION STATEMENTS OF FINANCIAL CONDITION (In thousands, except share amounts) September 30, 2018 September 30, 2017 ASSETS Cash and cash equivalents $ 257,612 $ 997,470 Time deposits 200,000 Investment securities available for sale ( AFS ) at fair value 700, ,438 Interest and fees receivable 35,729 36,258 Export loans guaranteed or insured by Ex-Im Bank 4,719,642 5,705,564 Other guaranteed Loans 50,497 63,301 Lending, net of unearned income 4,770,139 5,768,865 Allowance for loan losses (497) Total lending, net 4,769,642 5,768,865 Other assets and deferred charges 168,000 48,115 Total Assets $ 6,131,594 $ 7,339,146 LIABILITIES AND SHAREOWNERS EQUITY Liabilities Short-term notes 908,995 $ 1,818,626 Interest payable 29,813 32,145 Accrued expenses and other liabilities 25,969 12,323 Long-term debt 5,036,590 5,332,825 Total Liabilities 6,001,367 7,195,919 Shareowners Equity Common stock-no par value; authorized 40,000 shares; outstanding 17,786 shares at September 30, 2018 and September 30, ,950 38,950 Retained earnings 96, ,359 Accumulated other comprehensive loss (5,630) (3,082) Total Shareowners Equity 130, ,227 Total Liabilities and Shareowners Equity $ 6,131,594 $ 7,339,146 See Notes to Financial Statements 28

31 STATEMENTS OF OPERATIONS STATEMENTS OF OPERATIONS Year Ended September 30, (In thousands, except per share amounts) FINANCING REVENUE Interest $ 152,606 $ 121,096 $ 95,737 Commitment and prepayment fees 1,530 3, Total Financing Revenue 154, ,571 96,665 FINANCING EXPENSE Interest (152,382) (114,966) (84,706) Commitment and other fees (3,585) (3,732) (4,167) Total Financing Expense (155,967) (118,698) (88,873) Net Financing Income (Expense) (1,831) 5,873 7,792 Net securities (loss) gain (3) (54) 2,074 Provision for loan losses (497) General and administrative expenses (9,993) (10,290) (10,808) Loss before income tax (12,324) (4,471) (942) Income tax benefit 1,099 1, Net Loss $ (11,225) $ (2,958) $ (595) NET INCOME (LOSS) PER SHARE $ (631.11) $ (166.29) $ (33.46) See Notes to Financial Statements 29

32 STATEMENTS OF COMPREHENSIVE LOSS STATEMENTS OF COMPREHENSIVE LOSS Year Ended September 30, (In thousands) Net Loss $ (11,225) $ (2,958) $ (595) Unrealized losses on investment securities - AFS (2,674) (1,917) (1,515) (net of income tax (benefit) provision of ($921); ($988) and ($780), respectively) Reclassification adjustment for net securities gains (losses) included in net income (loss) (3) (36) 1,369 (net of income tax (benefit) provision of ($1); ($19) and $705, respectively) Pension and post retirement adjustment (231) (net of income tax (benefit) provision of $240; $277 and ($119), respectively) Other comprehensive loss (1,775) (1,416) (377) Comprehensive Loss $ (13,000) $ (4,374) $ (972) See notes to Financial Statements 30

33 STATEMENTS OF CHANGES IN SHAREOWNERS EQUITY STATEMENTS OF CHANGES IN SHAREOWNERS EQUITY (In thousands, except per share amounts) Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Shareowners Equity Balances at September 30, 2015 $ 38,950 $ 110,912 $ (1,289) $ 148,573 Comprehensive loss: Net loss (595) (595) Other comprehensive loss (377) (377) Balances at September 30, 2016 $ 38,950 $ 110,317 $ (1,666) $ 147,601 Comprehensive loss: Net loss (2,958) (2,958) Other comprehensive loss (1,416) (1,416) Balances at September 30, 2017 $ 38,950 $ 107,359 $ (3,082) $ 143,227 Comprehensive loss: Net loss (11,225) (11,225) Other comprehensive loss (1,775) (1,775) Reclassification of Stranded Income Taxes (note 8) 773 (773) Balances at September 30, 2018 $ 38,950 $ 96,907 $ (5,630) $ 130,227 See Notes to Financial Statements 31

34 STATEMENTS OF CASH FLOWS STATEMENTS OF CASH FLOWS Year Ended September 30, (In thousands) OPERATING ACTIVITIES Net loss $ (11,225) $ (2,958) $ (595) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 20,076 17,510 13,589 Provision for loan losses 497 Net (gain) loss on investment securities 3 54 (2,074) Net gain on prepayments of loans (1,585) (3,465) (766) Decrease (increase) in deferred taxes 2, (339) Decrease in interest and fees receivable 529 3,353 11,392 Decrease in interest payable (2,332) (1,659) (8,532) Decrease in accrued expenses and other liabilities (457) (3,659) (16,116) Other, net 5,125 (2,879) 10,761 Net cash provided by operating activities 7,975 6,822 7,320 INVESTING ACTIVITIES Proceeds from maturities of investment securities 967,494 1,072,571 60,355 Placement of time deposits (200,000) Proceeds from sales of investment securities 3,996 27, ,603 Purchases of investment securities (1,342,503) (810,718) (800,685) Principal collected on loans 1,274,667 1,293,567 1,417,286 Principal disbursed on loans (369,339) (169,035) (504,313) Net cash provided by investing activities 334,315 1,414, ,246 FINANCING ACTIVITIES Proceeds from issuance of short-term notes 4,808,155 6,638,911 11,011,383 Repayments of short-term notes (5,738,033) (6,924,909) (11,113,717) Proceeds from issuance of long-term debt less issuance costs 847,730 Repayments and repurchases of long-term debt (1,000,000) (850,000) (650,000) Dividends paid (240) Net cash used in financing activities (1,082,148) (1,135,998) (752,574) Increase (decrease) in Cash and cash equivalents (739,858) 285,133 (382,008) Cash and cash equivalents at the beginning of the year 997, ,337 1,094,345 Cash and cash equivalents at the end of the year $ 257,612 $ 997,470 $ 712,337 SUPPLEMENTAL DISCLOSURES Interest paid $ 150,311 $ 168,197 $ 194,699 Income taxes paid $ $ $ 1,110 See Notes to Financial Statements 32

35 NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION Private Export Funding Corporation ( PEFCO ) was incorporated on April 9, 1970 under Delaware law and is principally engaged in making U.S. dollar loans to foreign importers to finance purchases of goods and services of United States manufacture or origin. PEFCO s shareowners include most of the major commercial banks involved in financing U.S. exports, industrial companies involved in exporting U.S. products and services, and financial services companies. PEFCO was established with the support of the United States Department of the Treasury and the Export-Import Bank of the United States ( Ex-Im ) to assist in the financing of U.S. exports through the mobilization of private capital as a supplement to the financing already available through Ex-Im, commercial banks and other lending institutions. Ex-Im has cooperated in the operation of PEFCO through various agreements. 2. AGREEMENTS WITH EX-IM BANK PEFCO has agreements with Ex-Im which provide that Ex-Im will: 1. guarantee the due and punctual payment of principal and interest on all export loans made by PEFCO (the Guarantee Agreement ); and 2. guarantee the due and punctual payment of interest on PEFCO s long-term Secured Notes in return for a fee paid by PEFCO. Under its agreements with PEFCO, Ex-Im retains a broad measure of supervision over PEFCO s major financial management decisions. The approval of Ex-Im is required on the terms of PEFCO s individual loan commitments and on the terms of PEFCO s long-term debt issues. Surplus funds may be invested only in Ex-Im-approved types of assets. The prior consent of Ex-Im is required in order for PEFCO to withdraw any excess collateral or substitute for any items previously collateralized under the Secured Notes program. Ex-Im is entitled to represen tation at all meetings of PEFCO s Board of Directors and Advisory Board. PEFCO furnishes Ex-Im with full information as to budgets, financial condition, and operating results. Fees paid for the guarantee of interest on Long-term Secured Notes were $215 thousand in 2018, $245 thousand in 2017, and $267 thousand in Over the years, Ex-Im s statutory authority to exercise its functions has been limited to specified periods, which have been extended by Congressional action from time to time. The Export-Import Bank Reform and Reauthorization Act of 2015 (PL ) extended Ex-Im s corporate existence through September 30, Since the reauthorization, Ex-Im has not had the requisite number of directors appointed by Congress to form the necessary quorum to approve loans greater than $10 million. If the corporate existence of Ex-Im shall terminate or have been terminated, under the provisions of the Export-Import Bank Act of 1945, as amended, such a termination of the corporate existence of Ex-Im would have no effect on the Guarantee Agreement, and no effect on Ex-Im s guarantee of interest on the outstanding Secured Notes. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements include, in the opinion of Management, all material and recurring adjustments considered necessary for a fair presentation in conformity with accounting principles generally accepted in the United States of America ( U.S. GAAP ). Certain prior year amounts have been reclassified to conform to fiscal 2018 presentation. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires Management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Cash and Cash Equivalents Generally, Cash and cash equivalents consist of cash on hand, deposits held at banks, highly liquid money market account balances, and U.S. Treasury Securities with maturities of three months or less from date of purchase. Substantially all PEFCO s cash and cash equivalents are held by six financial institutions that Management believes are of high credit quality which at times can exceed the Federal Deposit Insurance Corporation s insurance limit. At September 30, 2018 and September 30, 2017, approximately 12% and 70%, respectively, of the Cash and cash equivalents were held in money market funds invested in U.S. Treasuries and repurchase agreements in respect of such securities. Time Deposits Time deposits are interest-bearing accounts which have specified dates of maturity of more than three months from the date of deposit and may be withdrawn by giving notice, with penalties for early withdrawal. The funds are held by a financial institution management believes is of high credit quality which at times can exceed the Federal Deposit Insurance Corporation s insurance limit. 33

36 NOTES TO FINANCIAL STATEMENTS Investment Securities Investment securities that may be sold in response to changes in market interest rates, needs for liquidity, changes in funding sources and terms or other factors are classified as securities available for sale. The classification is determined at the time each security is acquired. At each reporting date, the appropriateness of the classification is reassessed and the securities are assessed for other than temporary impairment. Investment securities may include securities pledged as collateral under the terms of the 1971 Guarantee and Credit Agreement with Ex-Im. The securities are carried at fair value with unrealized gains and losses, net of income taxes, reported as a component of Accumulated other comprehensive income (loss) ( AOCI ). Interest income on investment securities, including amortization of premiums and accretion of discounts, is recognized when earned using methods that approximate the interest method. Security transactions are accounted for as of the date these securities are purchased or sold (trade date). Realized gains and losses are reported on a first-in, first-out basis. Loans, Interest and Fees Loans are reported at their principal amounts outstanding, net of unamortized premium or discounts and adjustments under fair value hedge accounting (see Note 11) and may include loans pledged as collateral under the terms of the 1971 Guarantee and Credit Agreement with Ex-Im. Interest income is recognized when earned and related unamortized premium and discount are amortized to interest income on an effective yield basis over the life of the loan. Fees are received from the undisbursed balances of loan commitments and fee income is recognized over the period the service is provided. A borrower may cancel all or any portion of an unused fixed-rate loan commitment or prepay a fixed-rate loan by paying PEFCO a fee equal to the present value of the reinvestment loss, if any, incurred by PEFCO. Cancellation and prepayment fees are recorded as income by PEFCO upon receipt. Allowance for Loan Losses Since all loans made by PEFCO are guaranteed or insured as to the due and punctual payment of principal and interest by Ex-Im Bank or other U.S. government institutions, such as the Overseas Private Investment Corporation ( OPIC ), whose obligations are backed by the full faith and credit of the United States, PEFCO relies upon this U.S. government support and does not make evaluation of credit risks, appraisals of economic conditions in foreign countries, or reviews of other factors in making its loans. In addition, insured loans are supported by guarantees from the respective lenders. Accordingly, PEFCO does not presently maintain an allowance for its guaranteed loans. With regards to its insured loans with Ex-Im, in the event official cover is denied or there is residual operational risk associated with a transaction, the company evaluates the need for a reserve based on the probability of loss. Other Assets and Deferred Charges and Accrued Expenses and Other Liabilities Other Assets and Deferred Charges include, among other things, premises and equipment (including internally developed software), net deferred tax assets and the fair value of PEFCO s derivative financial instruments. Accrued Expenses and Other Liabilities include, among other things, operating expense accruals, tax accruals and other payables. Internally developed software and equipment and leasehold improvements are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful life of the asset and, for leasehold improvements, over the estimated useful life of the improvement or the lease term, whichever is shorter. Derivative Financial Instruments In connection with PEFCO s asset/liability management process, the purpose of which is to manage and control the sensitivity of PEFCO s earnings to changes in market interest rates, PEFCO may enter into derivative financial instruments including interest rate swap contracts that are designated as cash flow or fair value hedges of specific assets or groups of similar assets or similar liabilities and anticipated debt issuance transactions. Interest rate swaps are transactions in which two parties agree to exchange, at specified intervals, interest payment streams calculated on an agreed-upon notional amount with at least one stream based on a specified floating-rate index. The credit risk inherent in interest rate swaps arises from the potential inability of counterparties to meet the terms of their contracts. Swap contracts may be novated and cleared through a Central Clearing Counterparty ( CCP ), an institution which takes on the counterparty risk and provides clearing and settlement services. Derivative financial instruments are recorded on the statement of financial condition as either an asset or liability measured at fair value. Derivatives are recorded on a net-by-counterparty basis in the Statement of Financial Condition when a legal right to offset exists under an enforceable netting arrangement. If the derivative is designated as a fair value hedge, the changes in fair value of the derivative and hedged item are recognized in earnings. If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded in Other comprehensive income (loss) ( OCI ) and are recognized in the income statement 34

37 NOTES TO FINANCIAL STATEMENTS when the hedged item affects earnings. Interest on fair value hedges of fixed-rate loans is reported net of interest income on loans. Interest on fair value hedges of long-term debt is reported net of interest expense on long-term debt. PEFCO had no cash flow hedges for the years ended 2018, 2017 and Effective January 3, 2017, PEFCO s CCP, the Chicago Mercantile Exchange ( CME ), amended its rulebook to legally characterize variation margin payments for over-the-counter derivatives they clear as settled-to-market rather than collateralized-to-market. The change has the effect of recharacterizing the previously recorded mark-to-market gains or losses as derivative assets or liabilities to record a receivable from, or payable to, the CCP bank, who settles with the CME on PEFCO s behalf. While the CCP bank settles directly with the CME daily, PEFCO may be required to deposit, or is entitled to withdraw, amounts from this interest-bearing account which are less than, or in excess of, required margins established by the CME. PEFCO formally documents all relationships between hedging instruments and hedged items. Also, PEFCO formally assesses whether the derivatives used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. Debt Short-term notes and Long-term debt are accounted for at amortized cost, reported net of unamortized premium or discounts, deferred issuance costs and adjustments under fair value hedge accounting (see Note 11). Unamortized premiums, discounts and deferred issuance costs are amortized to interest expense on a straight-line basis over the life of each issue. Fair Value Measurement PEFCO reports fair value measurements for specialized classes of assets and liabilities. In measuring fair value, PEFCO utilizes fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The highest priority is given to quoted prices in active markets and the lowest priority to unobservable inputs. Additional disclosure requirements are required for the lowest priority level. At PEFCO, fair value measurement is calculated using prices from data providers and dealers. U.S. Treasury Securities reported as Cash and cash equivalents are carried at amortized cost which approximates fair value, due to the short-term nature of the instrument. Dividends and Distribution to Shareowners Dividends and distribution to shareowners are recorded on the ex-dividend date. Income Taxes Income taxes are recorded based on the provisions of enacted tax laws, including the tax rates in effect for current and future years. Net deferred tax assets are recognized to the extent that it is more likely than not that these future benefits will be realized. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. When accounting for interest and penalties related to income taxes, PEFCO reports them as General and administrative expenses in the Statements of Operations and Accrued expenses and other liabilities in the Statements of Financial Condition. Recently Issued Accounting Pronouncements In August 2018, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) No , Intangibles Goodwill and Other Internal-Use Software (Subtopic ) Customer s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The ASU aligns the accounting for costs incurred to implement a cloud computing arrangement ( CCA ) that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, the ASU amends ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC to determine which implementation costs should be capitalized in a CCA that is considered a service contract. The amendments in this ASU are effective for PEFCO October 1, 2021 and early adoption is permitted. PEFCO is evaluating the impact the guidance will have on its financial statements. In August 2018, FASB issued ASU No , Compensation Retirement Benefits Defined Benefit Plans General (Subtopic ) Disclosure Framework Changes to the Disclosure Requirements for Defined Benefit Plans which amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The ASU s changes related to disclosures are part of the FASB s disclosure framework project, which the Board launched in 2014 to improve the effectiveness of disclosures in notes to financial statements. The ASU is effective for PEFCO October 1, 2021 but early adoption is permitted. PEFCO is evaluating the impact the guidance will have on its financial statements. 35

38 NOTES TO FINANCIAL STATEMENTS In February 2018, FASB issued ASU No , Income Statement Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which addresses certain stranded income tax effects in accumulated other comprehensive income (AOCI) resulting from the Tax Cuts and Jobs Act ( TCJA ). The ASU provides financial statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA (or portion thereof) is recorded. The amendments are effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years but early adoption in any interim period is permitted. PEFCO elected to early adopt and applied the amendments retrospectively for fiscal year See Notes 7 and 8. In August 2017, the FASB issued ASU No , Targeted Improvements to Accounting for Hedging Activities, which will better align an entity s risk management activities and financial reporting for hedging relationships through changes to the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The targeted improvements in the ASU will allow increased flexibility to structure hedges of fixed and floating rate instruments. Application of the ASU is expected to reduce the amount of ineffectiveness as the revised accounting guidance will better reflect the economics of our risk management activities. The ASU requires the hedging instrument to be presented in the same line item as the hedged item and also requires expanded disclosures. The mandatory effective date for PEFCO, a non-public business entity, is October 1, 2020 but the amendments may be early adopted in any interim or annual period after issuance. PEFCO is evaluating the impact the guidance will have on its financial statements. In March 2017, the FASB issued ASU No , Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which changes the income statement presentation of net benefit expense and requires restating the Company s financial statements for each of the earlier periods presented. The ASU requires that only the service cost component of net benefit expense be included in the Compensation and benefits line on the income statement. The other components of net benefit expense will be required to be presented outside of the Compensation and benefits line and will be presented in Other operating expense. Since both of these income statement line items are part of General and administrative expenses, the total will not change, nor will there be any change in Net income. This change in presentation is not expected to have a material effect on PEFCO s financial statements. The components of the net benefit expense are currently disclosed in Note 9 to the Financial Statements. The new standard also changes the components of net benefit expense that are eligible for capitalization when employee costs are capitalized in connection with various activities, such as internally developed software. Only the service cost component of net benefit expense may be capitalized. Existing capitalized balances are not affected. For PEFCO, the change in presentation is effective for annual and interim periods starting October 1, Adoption of this guidance is not expected to have a material impact on PEFCO s financial statements. In November 2016, the FASB issued ASU No Statement of Cash Flows (Topic 230): Restricted Cash (A Consensus of the FASB Emerging Issues Task Force). The objective of this ASU is to provide financial statement users with specific guidance on the presentation of restricted cash or restricted cash equivalents in a statement of cash flows under Topic 230. A statement of cash flows is required to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. For private companies, the ASU will be effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, Adoption of this ASU is not expected to have a material impact on PEFCO s financial statements. The FASB issued in June 2016 ASU No Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity. To do this, the incurred loss impairment methodology in current U.S. GAAP will be replaced with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The FASB does not specify a method for measuring expected credit losses and allows an entity to apply methods that reasonably reflect its expectations of the credit loss estimate. For private companies, the ASU will be effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, Adoption of this ASU is not expected to have a material impact on PEFCO s financial statements. In March 2016, the FASB issued ASU No Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The amendments in the ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For private companies, 36

39 NOTES TO FINANCIAL STATEMENTS the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, This guidance is not expected to have a material impact on PEFCO s financial statements. In February 2016, the FASB issued ASU Leases (Topic 842), the purpose of which is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. For lessees under an operating lease, the lessee is required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial condition; recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and classify all cash payments within operating activities in the statement of cash flows. For private companies, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, Early application is permitted. This guidance is not expected to have a material impact on PEFCO s financial statements. In January 2016, the FASB issued ASU No Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities. Among other provisions, the amendments in this update eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for private companies, require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements, and requires evaluation of the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity s other deferred tax assets. For private companies, the amendments in this ASU are effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, Private companies may adopt the amendments in this update early for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. PEFCO early applied the provisions of this pronouncement with regards to disclosure of financial instruments carried at amortized cost. Adoption of the remaining portions of ASU is not expected to have a material impact on PEFCO s financial statements. In August 2015, FASB issued ASU No Revenue from Contracts with Customers (Topic 606) which deferred by one year the effective date of ASU of the same title. The purpose of the ASU is to provide a comprehensive, industry-neutral revenue recognition model intended to increase financial statement comparability across companies and industries, and significantly reduce the complexity inherent in today s revenue recognition guidance. This ASU affects any entity that enters into contracts to transfer goods or services, or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., leases, insurance contracts, financial instruments). ASU defers the effective date of ASU for private companies to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, Management is continuing to assess the effect of this ASU on PEFCO s financial statements. 4. INVESTMENT SECURITIES September 30, 2018 Available for Sale (In thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (a) Average Yield (b) U.S. Treasury Securities Maturity in one year or less $ 516,250 $ $ 376 $ 515, % Maturity after one year through five years 40, , % U.S. Guaranteed Securities (c) Maturity in one year or less 6, , % Maturity after one year through five years 28,945 1,034 27, % Maturity after five years through ten years 71, ,911 69, % Maturity after ten years 44,061 2,122 41, % Total Available for Sale Securities $ 706,843 $ 88 $ 6,320 $ 700, % 37

40 NOTES TO FINANCIAL STATEMENTS September 30, 2017 Available for Sale (In thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (a) Average Yield (b) U.S. Treasury Securities Maturity in one year or less $ 260,940 $ 3 $ 195 $ 260, % Maturity after one year through five years 65, , % U.S. Guaranteed Securities (c) Maturity in one year or less 9, , % Maturity after one year through five years 31, , % Maturity after five years through ten years 68, , % Maturity after ten years 56, ,085 55, % Total Available for Sale Securities $ 491,071 $ 195 $ 2,828 $ 488, % (a) The fair value of PEFCO s portfolio of investment securities is based on independent dealer quotations. (b) The average yield is based on effective rates on carrying values at the end of the year. (c) These securities are explicitly guaranteed by the U.S. and include securities issued by, among others, the Government National Mortgage Association, the Overseas Private Investment Corporation, and the Small Business Association. Cash proceeds from the sales of available for sale securities during 2018, 2017, and 2016 were $4.0 million, $27.9 million, and $190.6 million respectively. Net losses from available for sale securities sold in fiscal year 2018 amounted to $3 thousand. Net losses from available for sale securities sold in fiscal year 2017 amounted to $54 thousand (gross gains of $85 thousand and gross losses of $139 thousand). Net gains from available for sale securities sold in fiscal year 2016 amounted to $2.1 million (gross gains of $2.1 million and gross losses of $42 thousand). The following table provides the gross unrealized losses and fair value aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position: September 30, 2018 (In thousands) Less than 12 months 12 months or more September 30, 2017 (In thousands) Less than 12 months 12 months or more Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasury Securities $ 466,082 $ 199 $ 89,072 $ 991 U.S. Guaranteed Securities 37, ,178 4,688 U.S. Treasury Securities $ 200,639 $ 311 $ 69,645 $ 499 U.S. Guaranteed Securities 67, ,750 1,451 Total temporarily impaired securities $ 504,028 $ 641 $ 192,250 $ 5,679 Total temporarily impaired securities $ 268,472 $ 878 $ 135,395 $ 1,950 These investment securities are backed by the full faith and credit of the U.S. government. The unrealized losses on these investments resulted from the movement in the yield curve and are not credit related. PEFCO has not recognized any other-thantemporary impairment on any securities with unrealized losses as there is no intent to sell these securities and it is not more likely than not that PEFCO will be required to sell the security before the recovery of the entire amortized cost basis of the security. Investment Securities include securities pledged as collateral for PEFCO s Secured Notes program. The amount of securities pledged at September 30, 2018 and 2017, were $414 million and $265 million, respectively. 38

41 NOTES TO FINANCIAL STATEMENTS 5. LENDING PROGRAMS Loans outstanding at September 30, 2018, and related undisbursed commitments were classified as follows: (In thousands) Outstanding Loans Undisbursed Commitments Export loans guaranteed or insured by Ex-Im Bank Amount Average Rate Amount Direct & Secondary Long-term Loan Programs Fixed-rate $ 3,096, % $ (b) Floating-rate 1,581,729 (a) (a) Short-term & Medium-term Loan Programs Fixed-rate 22, % 1,897 (b) Floating-rate 90,443 (a) 10,947 (a) $ 4,791,902 $ 12,844 Other guaranteed loans $ 50,497 (a) (c) (a) (c) $ 4,875 Total $ 4,842,399 $ 17,719 Fair Value Hedge Adjustment (68,378) Unamortized Premium 576 Unamortized Discount (4,458) Total Carrying Value $ 4,770,139 (a) The base interest rate is the London Interbank Offered Rate ( LIBOR ). (b) The interest rate will be determined upon pricing (Direct and Secondary) / disbursement (Short and Medium-term). (c) These transactions are unconditionally guaranteed by the sovereign governments involved and are guaranteed by OPIC against the non-honoring of such sovereign guarantees. Loans outstanding at September 30, 2017, and related undisbursed commitments were classified as follows: (In thousands) Outstanding Loans Undisbursed Commitments Export loans guaranteed or insured by Ex-Im Bank Amount Average Rate Amount Direct & Secondary Long-term Loan Programs Fixed-rate $ 3,724, % $ (b) Floating-rate 1,844,396 (a) (a) Short-term & Medium-term Loan Programs Fixed-rate 32, % (b) Floating-rate 79,861 (a) 10,228 (a) $ 5,681,059 $ 10,228 Other guaranteed loans $ 63,301 (a) (c) Total $ 5,744,360 $ 10,228 Fair Value Hedge Adjustment 28,402 Unamortized Premium 793 Unamortized Discount (4,690) Total Carrying Value $ 5,768,865 (a) The base interest rate is the London Interbank Offered Rate ( LIBOR ). (b) The interest rate will be determined upon pricing (Direct and Secondary) / disbursement (Short and Medium-term). (c) These transactions are unconditionally guaranteed by the sovereign governments involved and are guaranteed by OPIC against the non-honoring of such sovereign guarantees. (a) (c) 39

42 NOTES TO FINANCIAL STATEMENTS Outstanding loans were scheduled for repayment at September 30, 2018 as follows (in thousands): 2019 $ 1,023, , , , , and thereafter 898,774 Total before Fair Value Hedge Adjustment, Unamortized Premium, and Unamortized Discount $ 4,842,399 In fiscal year 2018, PEFCO recorded a loan loss provision on a loan whose insurance was denied by Ex-Im Bank. The provision amounted to $497 thousand. PEFCO uses derivative contracts, primarily interest rate swaps, to effectively limit exposure to changes in the value of its fixed rate loans. The maturity structure of the derivatives generally correspond to the maturity structure of the loan being hedged. Reported loan balances include foreign importer notes backed by the Guarantee Agreement pledged as collateral for PEFCO s Secured Notes program. The amount of loans pledged at September 30, 2018 and 2017, were $4,255 million and $5,016 million, respectively. 40

43 NOTES TO FINANCIAL STATEMENTS 6. DEBT PEFCO manages its liquidity and interest rate exposures through the combination of short-term notes, secured and unsecured long-term debt issuances, and interest rate derivatives. Short-term notes and Long-term debt are accounted for at amortized cost except where the debt is in a fair value hedging relationship. Short-term Notes PEFCO s Short-term notes consist of commercial paper which is generally issued in amounts not less than $100 thousand and with maturities of 270 days or less. At September 30, 2018 and 2017, PEFCO s Short-term notes outstanding consists of principal of $912 million and $1.8 billion, respectively. Long-term Debt The Company raises long-term funds through the issuance of medium-term notes or secured notes which are sold through underwriters who may also be shareowners of the Company. Medium-term notes are unsecured notes with maturities from nine months to five years and secured notes typically have original maturities of five years or longer. PEFCO uses derivative contracts, primarily interest rate swaps, to effectively convert a portion of its fixed-rate debt to variablerate debt. The maturity structure of the derivatives generally corresponds to the maturity structure of the debt being hedged. Short-term notes averaged approximately $1.3 billion and $1.9 billion for the years ended September 30, 2018 and 2017, respectively. The average interest rate was 1.75% in 2018 and 1.08% for Balance Outstanding Designated Collateral Installments (In thousands) Secured Notes CC % notes due Dec-17 $ $ 500,000 $ $ 695,849 JJ % notes due Jul , ,563 Z % notes due Mar , , , ,808 HH % notes due Aug , , , ,385 LL % notes due Mar , , , ,021 MM % notes due Sep , , , ,037 BB % notes due Dec , ,000 1,059,090 1,156,834 EE % notes due May , , , ,459 II % notes due Nov , , , ,611 KK % notes due Jan , , , ,350 GG % notes due Jul , , , ,354 NN % notes due Jun , , , ,679 Sub-total $ 4,275,000 $ 5,275,000 Medium-term Notes (unsecured) Series % notes due Dec-19 $ 250,000 $ N/A N/A Series % notes due Feb ,000 N/A N/A Series Floating rate notes due Jul ,000 N/A N/A Sub-total $ 850,000 $ Total Long-term Debt $ 5,125,000 $ 5,275,000 Fair Value Hedge Adjustment (82,580) 63,556 Unamortized Premium 5,647 8,020 Unamortized Discount (3,676) (4,802) Deferred Issuance Costs (7,801) (8,949) Total Carrying Value $ 5,036,590 $ 5,332,825 Average principal balance outstanding $ 5,215,734 $ 5,726,280 Effective interest rate 2.83% 2.86% Average interest costs after hedge accounting 2.49% 1.65% 41

44 NOTES TO FINANCIAL STATEMENTS Remaining Maturities of Long-term Debt at September 30, 2018 were as follows (in thousands): 2019 $ 1,000, ,275, , ,000, , and thereafter 1,150,000 Total $ 5,125,000 Collateral The principal of all Secured Notes is fully backed by collateral assets held in a trust arrangement which are owned and recorded by PEFCO in its Statements of Financial Condition. Collateral assets may include U.S. Treasury Securities or other obligations unconditionally guaranteed or fully insured by the United States or agencies of the United States, foreign importer notes supported directly by export loan guarantees by Ex-Im Bank under the 1971 Guarantee Agreement and cash. The securities and notes are assigned to, and held by, the trustee, a shareowner of PEFCO. The collateral includes scheduled maturities which ensure, before the date on which payment of principal of each Secured Note is due, the trustee will have cash from maturing collateral sufficient to pay the principal of the Secured Notes. Payment of interest on the Secured Notes is fully guaranteed by Ex-Im Bank in return for a fee paid by PEFCO, which is accounted for on an accrual basis. The principal cash flows are segregated between designated installments (pledged in the trust against existing Secured Note issuances) and free installments (pledged in the trust arrangement but not designated currently against any existing Secured Note issuances). Designated installments in excess of a Secured Note principal redemption are available to back the next scheduled Secured Note redemption. Free installments are available collateral for pledging against future Secured Note issuances, or transferring out of the trust if held as current cash. At September 30, 2018 and 2017, assets pledged in support of the secured notes program was as follows: In Thousands Cash and cash equivalents $ 14,000 $ 343,000 U.S. Gov t guaranteed securities (included in Investment securities AFS) 414, ,000 Export loans guaranteed by Ex-Im Bank 4,255,000 5,016,000 Total pledged collateral $ 4,683,000 $ 5,624,000 Revolving Credit Facilities PEFCO has three syndicated revolving credit facilities in place with 10 banks, of which 9 are shareowners, totaling $1.0 billion: a 364-day facility for $640 million, a three-year $200 million facility expiring in 2020, and a three-year $160 million facility expiring in At September 30, 2018 and September 30, 2017, there were no amounts outstanding under any facility. 42

45 NOTES TO FINANCIAL STATEMENTS 7. SHAREOWNERS EQUITY Common stock outstanding amounted to $39.0 million at September 30, 2018 and September 30, 2017, and shares issued and outstanding amounted to 17,786 at each period end. Net loss per share was $(631.11) in fiscal 2018, $(166.29) in fiscal 2017 and $(33.46) in fiscal Weighted average shares outstanding amounted to 17,786 for 2018, 2017 and Upon early adoption of ASU , PEFCO retrospectively reclassified $773 thousand of stranded income tax effects on AOCI to Retained Earnings in fiscal year 2018 as of the enactment date of TCJA. See note 8. Under an agreement with Ex-Im Bank effective December 16, 2010, PEFCO has approval to declare or pay dividends of up to 50% of annual net income, subject to the following: (i) the shareowners equity of PEFCO, after giving effect to such dividend, is maintained at a minimum of $60 million (excluding the impact on shareowners equity of market value accounting for investment securities and for cash flow hedges); (ii) PEFCO maintains, after giving effect to such dividend, a leverage ratio of guaranteed assets to shareowners equity not in excess of 75 to 1; and (iii) PEFCO maintains an AAA rating from a major rating agency on all secured debt issued. No dividends have been declared in the fiscal years ended September 30, 2018, 2017 and INCOME TAXES Recent Tax Legislation On December 22, 2017, the Tax Cuts and Jobs Act ( TCJA ) was enacted into law, which significantly changed existing U.S. tax law and included a provision which affected our business, reducing the U.S. federal statutory tax rate from 34% to 21%, effective January 1, During fiscal year 2018, the Company recorded a net charge of $1,489 thousand related to the TCJA, for the impact of changes in the tax rate on net deferred tax assets which was included in Income tax benefit in our Statements of Operations and Other assets and deferred charges in our Statements of Financial Condition. We remeasured our deferred taxes to reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods. PEFCO elected to reclassify $773 thousand of stranded income tax effects in AOCI to Retained earnings which was included in the Statements of Financial Condition and Statements of Changes in Shareowners Equity for the year ended September 30, The amount of the reclassification is an adjustment for the difference between the historical corporate income tax rate (34%) and the newly enacted corporate income tax rate (21%). Due to the timing of the enactment and the complexity in applying the provisions of the TCJA, the provisional net charge is subject to revisions as we continue to complete our analysis of the TCJA, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service ( IRS ), FASB, and other standardsetting and regulatory bodies. Adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. Our accounting for the estimated tax effects of the TCJA will be completed during the measurement period, which is not expected to extend beyond one year from the enactment date. 43

46 NOTES TO FINANCIAL STATEMENTS The components of Income tax (benefit) provision are as follows for the years ended September 30: (In thousands) Federal-current $ $ (1,761) $ (127) Federal-deferred (1,099) 248 (220) $ (1,099) $ (1,513) $ (347) A comparison of the U.S. Federal statutory tax rate to the effective income tax rate is as follows for the years ended September 30, Tax at statutory rate 24.3% 34.0% 34.0% Effective income tax rate 8.9% 33.9% 36.9% PEFCO recorded a tax provision to adjust net deferred tax assets originally recorded at 34%, now expected to be realized at the new 21% rate, which caused the effective tax rate to be reduced to 8.9%. Included in Other assets and deferred charges at September 30, 2018 is a net deferred tax asset of $5,221 thousand ($3,460 thousand in 2017). Deferred tax assets and liabilities result from timing differences when recognizing certain revenue and expenses for book and tax purposes. Differences include recording hedge ineffectiveness, depreciation, pension and postretirement costs, severance payments, unrealized gains or losses on available for sale securities, loan losses and the net operating loss for fiscal year PEFCO determined that, as it was more likely than not that such deferred tax asset would be realized in the future, no valuation allowance was required as of September 30, 2018 and This determination was made based upon The following table is an analysis of the deferred tax assets/(liabilities) for the years ended September 30: (In thousands) Deferred Tax Asset (Liability) Deferred Tax Asset (Liability) Total deferred tax assets $ 5,530 $ 4,062 Total deferred tax liabilities (309) (602) Net deferred tax assets $ 5,221 $ 3,460 the evidence of prior years earnings as well as expected future earnings. The Company has not recorded any uncertain tax positions as of September 30, 2018 and The Company does not expect its uncertain tax position balance to change significantly in the next 12 months. The Company is no longer subject to examinations by taxing authorities for all fiscal years prior to the one ended September 30, Currently, there is an examination of the September 30, 2016 tax year in progress and the Company has not been notified of any future examination by applicable taxing authorities. PEFCO has $196 thousand of net operating loss carryforwards which expire in 2037 and $12.1 million of net operating loss carryforwards which, under TCJA, have no expiration date. 44

47 NOTES TO FINANCIAL STATEMENTS 9. EMPLOYEE BENEFIT PLANS Pension and Postretirement Plans PEFCO has two pension plans - a funded, noncontributory, qualified defined benefit pension plan covering all full-time employees and an unfunded, noncontributory, nonqualified pension plan which provides defined pension benefits to certain employees. Pension benefits are primarily based upon the participant s compensation level and years of credited service. PEFCO provides healthcare and life insurance benefits to eligible retired employees. The postretirement healthcare plan is contributory; the life insurance plan is noncontributory. All postretirement plans are funded on a pay-as-you-go basis. PEFCO also has a defined contribution 401(k) plan in which all full-time employees, after completing six months of service, are eligible to participate. This plan allows employees to make pre-tax contributions to tax-deferred investment portfolios. Employees may contribute up to 12% of their compensation subject to certain limits based on federal income tax laws. PEFCO matches employee contributions up to 6% of an employee s compensation. Pension Plans The following tables summarize the funded status and amounts recognized in the Statements of Financial Condition for PEFCO s pension plans: Qualified Plan Nonqualified Plan (In thousands) Change in Benefit Obligation Benefit obligation at beginning of year $ 13,299 $ 13,235 $ 5,765 $ 5,912 Service cost Interest cost Actuarial loss (gain) (460) 199 (663) (163) Benefits paid (598) (1,238) (355) (355) Benefit obligation at end of year $ 13,332 $ 13,299 $ 5,153 $ 5,765 Change in Plan Assets Fair value of plan assets at beginning of year $ 11,919 $ 11,113 $ $ Actual return on plan assets 823 1,334 Employer contributions Benefits paid (598) (1,238) (355) (355) Fair value of plan assets at end of year $ 12,744 $ 11,919 $ $ Funded status at end of year (a) $ 588 $ 1,380 $ 5,153 $ 5,765 (a) These amounts were recognized in Accrued expenses and other liabilities in the Statements of Financial Condition as of September 30, 2018 and Amounts Recognized in Accumulated Other Comprehensive Income (Loss) Net loss $ 1,121 $ 1,874 $ 1,247 $ 1,991 Prior service cost (2) (3) Total $ 1,121 $ 1,874 $ 1,245 $ 1,988 45

48 NOTES TO FINANCIAL STATEMENTS The Net periodic benefit cost and other amounts recognized in Other Comprehensive Income ( OCI ) for the two pension plans were as follows: Qualified Plan Nonqualified Plan (In thousands) Components of net periodic pension cost Service cost $ 620 $ 647 $ 766 $ 203 $ 172 $ Interest cost Expected return on plan assets (590) (562) (491) Amortization of prior service cost (3) (1) (1) 3 Amortization of net losses Net periodic pension cost $ 557 $ 657 $ 847 $ 486 $ 461 $ 289 Other Changes (1) Net (gain) loss $ (693) $ (574) $ 261 $ (663) $ (164) $ 583 Amortization of gain (56) (116) (111) (81) (91) (68) Amortization of prior service cost (3) Total Recognized in OCI $ (749) $ (690) $ 153 $ (743) $ (254) $ 512 (1) Before taxes at PEFCO s effective tax rate of approximately 21% for 2018, and 34% for 2017 and Assumptions Used for Pension Plan Accounting Discount rate assumptions used for pension plan accounting reflect prevailing rates available on high-quality, fixed income debt instruments with maturities that match the benefit obligation. The following rates were used in the measurement of the benefit obligation and net periodic pension costs: Weighted average discount rate, end of period 4.13% 3.63% 3.47% Weighted average discount rate, average for period 3.63% 3.47% 4.12% Weighted average rate of pay increase 4.00% 4.00% 4.00% Expected long-term rate of return on assets 5.00% 5.00% 5.00% PEFCO s pension plan asset allocation target and actual performance based on fair values, were as follows: Target Allocation September 30, 2018 September 30, 2017 (In thousands) Amount Percent Amount Percent Equity securities 60% $ 7,942 62% $ 8,457 71% Debt securities 40% 4,802 38% $ 3,462 29% Fair value at end of year 100% $ 12, % $ 11, % The funding objectives of the noncontributory, qualified defined benefit plan are to achieve and maintain plan assets adequate to cover the accumulated benefit obligation and to provide competitive investment returns and reasonable risk levels when measured against appropriate benchmarks. 46

49 NOTES TO FINANCIAL STATEMENTS Post Retirement Plan The Benefit obligations, Plan assets, Funded status and Net periodic benefit cost of PEFCO s postretirement plan were as follows: (In thousands) Change in benefit obligation Benefit obligation at beginning of year $ 1,834 $ 1,757 Service cost Interest cost Plan participants contributions Actuarial loss (gain) 132 (92) Benefits paid (93) (39) Benefit obligation at end of year $ 2,069 $ 1,834 Change in plan assets Fair value of plan assets at beginning of year $ $ Employer contribution Plan participants contributions Benefits paid (93) (39) Fair value of plan assets at end of year Funded status at end of year (a) $ 2,069 $ 1,834 (a) These amounts were recognized in Accrued expenses and other liabilities in the Statements of Financial Condition at September 30, 2018 and Amounts Recognized in Accumulated Other Comprehensive Income (Loss) Net (gain) $ (1,471) $ (1,796) Prior service credit (29) Total $ (1,471) $ (1,825) The Net periodic benefit cost and other amounts recognized in OCI follow: (In thousands) Components of periodic postretirement benefit cost Service cost $ 88 $ 119 $ 148 Interest cost Amortization of prior service credit (29) (47) (48) Amortization of net (losses) (193) (174) (119) Net periodic postretirement benefit cost (1) $ (66) $ (40) $ 69 Other Changes (2) Net (gain) loss $ 132 $ (92) $ (482) Amortization of prior service credit Amortization of actuarial gain Total Recognized in OCI $ 354 $ 129 $ (315) (1) The net periodic cost for 2018, 2017 and 2016 reflects the actuarially-determined expense. (2) Before taxes at PEFCO s effective tax rate of approximately 21% for 2018 and 34% for 2017 and

50 NOTES TO FINANCIAL STATEMENTS Assumptions Used for Postretirement Plan Accounting (In thousands) Weighted average discount rate, end of period 4.15% 3.79% 3.56% Weighted average discount rate, average for period 3.79% 3.56% 4.36% Assumed health care cost trend rate, pre % 7.25% 7.50% Assumed health care cost trend rate, post % 6.25% 6.50% Prescription cost trend rate 10.25% 10.50% 10.50% Ultimate rate to which rates are assumed to decline 3.89% 3.89% 3.89% Year in which ultimate rate is reached Impact of 1% increase in healthcare cost trend assumptions on PBO $ 340 $ 336 $ 338 Impact of 1% decrease in healthcare cost trend assumptions on PBO $ (355) $ (288) $ (343) Defined Contribution 401(k) Plan PEFCO sponsors a defined contribution 401(k) plan in accordance with local laws. The following table summarizes PEFCO s contributions to the defined contribution 401(k) plan: (In thousands) Contribution expense $ 166 $ 168 $ DERIVATIVE FINANCIAL INSTRUMENTS PEFCO uses derivative financial instruments, including interest rate swap contracts, as part of its asset/liability management activities. The objective of the asset/liability management process is to manage and control the sensitivity of PEFCO s earnings to changes in market interest rates. The process seeks to preserve earnings while not placing at risk of a 100 basis point movement in interest rates more than 10% of the pre-tax net present value of PEFCO s capital, which is the acceptable specified limit authorized by PEFCO s Board of Directors. PEFCO does not enter into interest rate swap contracts or other derivatives which are not designated as hedging instruments. Interest rate swap contracts are transactions in which two parties agree to exchange, at specified intervals, interest payment streams calculated on an agreed-upon notional amount with at least one stream based on a specified floating-rate index. The swap contracts maybe novated and cleared through a CCP, an institution which takes on the counterparty risk and provides claims and settlement services The notional principal amount of interest rate swap contracts do not represent the market or credit risk associated with those contracts but rather provide an indication of the volume of the transactions. The credit risk inherent in interest rate swaps arises from the potential inability of counterparties to meet the terms of their contracts. PEFCO performs credit reviews and enters into netting agreements to minimize the credit risk of interest rate swaps. There were no counterparty default losses in 2018, 2017, or

51 NOTES TO FINANCIAL STATEMENTS The following table summarizes the notional amount and credit exposure of PEFCO s derivative instruments designated as hedges at September 30, 2018 and 2017: (In thousands) Notional Credit Exposure Total Interest Rate Swaps $ 7,569,351 $ 8,550,391 $ 83,271 $ 96,946 Effect of master netting agreements (a) (81,937) (60,253) Total Credit Exposure $ 1,334 $ 36,693 (a) Represents the netting of derivative balances with the same counterparty under enforceable netting agreements. PEFCO has interest rate swap contracts designated as fair value hedges, which hedge the change in fair value of certain fixed-rate long-term loans and certain fixed-rate long-term debt. The objective of the fair value hedge is to protect the fixed-rate long-term loans and the fixed-rate long-term debt against changes in LIBOR which is the designated benchmark interest rate used by PEFCO. Certain fair value hedges are considered to be 100% effective as each meets shortcut method accounting requirements and, accordingly the changes in fair values of both the interest rate swap contracts and related debt or loans are recorded as equal and offsetting gains and losses in the Statements of Financial Condition. Accordingly, there was no gain or loss recognized in current period earnings related to these hedges. Certain fair value hedges do not meet shortcut accounting requirements and accordingly, the extent to which these instruments are effective at achieving offsetting changes in fair value must be assessed at least quarterly. Any ineffectiveness must be recorded in current period earnings. From time to time, PEFCO has interest rate swap contracts designated as cash flow hedges, which offset the variability in cash flows arising from the rollover of short-term notes (liabilities). The cash flow hedges are considered to be highly effective and accordingly, the changes in the cash flows of the interest rate swap contracts have been, and are expected to continue to be, highly effective at offsetting the changes in the cash flows of the short-term liabilities. Any ineffectiveness must be recorded in the current period earnings. The gains and losses deemed to be effective are recorded in accumulated other comprehensive income (loss), net of applicable income taxes. PEFCO had no interest rate swap contracts outstanding designated as cash flow hedges for the years ended September 30, 2018 and Hedge ineffectiveness recognized in earnings on designated and qualifying fair value hedges was recorded in Net Financing Revenue (Expense) as follows: (In thousands) Year ended September 30, Interest Rate Swaps $ (106) $ 469 $ (592) PEFCO has entered into interest rate swap contracts which are over-the-counter ( OTC ) agreements which clear directly with the counterparty or are cleared at the CME, a regulated clearing house. The notional value of swaps cleared through the CME at September 30, 2018 and 2017 were $7.5 billion and $8.3 billion, respectively, representing approximately 99% and 97% of the total notional values at September 30, 2018 and The value of OTC derivatives which clear directly with the counterparty is included in the financial statements at the gross fair amount of the asset (included in Other assets and deferred charges) or liability (included in Accrued expenses and other liabilities), which represents the change in the fair value of the contract since inception. The OTC trades which clear directly with the counterparty did not require PEFCO to pay or receive cash collateral in connection with uncleared derivative transactions in 2018 and Clearing is a process by which a third-party, the clearinghouse, steps in between the original counterparties and guarantees the performance of both, by requiring each to post liquid collateral on an initial (initial margin) basis and mark-to-market (variation margin) basis to cover the clearinghouse s potential future exposure in the event of a default. Due to a rulebook change at the CME (PEFCO s clearinghouse) effective January 3, 2017, the CME legally characterizes variation margin payments (a payment made based on the changes in the fair value of the interest rate swaps contracts) as a settlement, not as a collateral transfer. Therefore, the mark-to-market gain or loss on a settled-to-market derivative is no longer classified as a derivative asset or liability but as a receivable from, or payable to, our CCP until PEFCO settles with the CCP. 49

52 NOTES TO FINANCIAL STATEMENTS The following table presents the gross and net fair values of PEFCO s derivative instruments on the Statements of Financial Condition: Asset Derivatives (a) Liability Derivatives (b) (In thousands) Interest Rate Swaps (c) $ 83,271 $ 96,946 $ 96,040 $ 60,253 Effect of master netting agreements (e) (81,937) (60,253) (81,937) (60,253) Total reported on the Statements of Financial Condition (d) $ 1,334 $ 36,693 $ 14,103 $ (a) Reported as Other assets and deferred charges on the Statements of Financial Condition (b) Reported as Accrued expenses and other liabilities on the Statements of Financial Condition (c) Fair values are on a gross basis, before consideration of master netting agreements as required by ASC or settled-to-market positions with CME (d) Due to the CME rulebook change described above, the September 30, 2018 balances reported on the Statements of Financial Condition are further bifurcated into a derivative asset of $1.3 million for the OTC trades and a dervative liability of $14.1 million for amounts due to PEFCO s CCP for positions settled-to-market but for which the CCP has not requested settlement. The September 30, 2017 balance reported as Other assets and deferred charges ($36.7 million) is futher bifurcated into a derivative asset of $16.0 million for the OTC trades and $20.7 million for amounts due from PEFCO s CCP for positions settled-to-market but for which the CCP has not remitted the funds at our request. (e) All amounts qualifying for offset are offset as per ASU No , Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. 11. FAIR VALUE MEASUREMENTS PEFCO is required to report fair value measurements for specialized classes of assets and liabilities and utilizes a three-level valuation hierarchy established under U.S. GAAP for disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three-level hierarchy for fair value measurement is defined as follows: Level 1 Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that PEFCO has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. U.S. Treasury securities are included in Level 1. Level 2 Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 2 securities consist of U.S. Guaranteed Securities and interest rate swaps. Level 3 Valuations based on inputs that are unobservable and significant to the overall fair value measurement. 50

53 NOTES TO FINANCIAL STATEMENTS The following tables present for each of the fair value hierarchy levels, PEFCO s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2018 and September 30, 2017: September 30, 2018 (in thousands) Quoted Prices in Active Market (Level 1) Fair Value with Other Observable Inputs (Level 2) Fair Value with Significant Unobservable Inputs (Level 3) Netting (a) Total Assets U.S. Treasury Securities $ 555,154 $ $ $ $ 555,154 U.S. Guaranteed Securities 145, ,457 Interest rate swaps 83,271 (81,937) 1,334 Total Assets at Fair Value $ 555,154 $ 228,728 $ $ (81,937) $ 701,945 Liabilities Interest rate swaps $ $ 96,040 $ $ (81,937) $ 14,103 Total Liabilities at Fair Value $ $ 96,040 $ $ (81,937) $ 14,103 September 30, 2017 (in thousands) Quoted Prices in Active Market (Level 1) Fair Value with Other Observable Inputs (Level 2) Fair Value with Significant Unobservable Inputs (Level 3) Netting (a) Total Assets U.S. Treasury Securities $ 325,281 $ $ $ $ 325,281 U.S. Guaranteed Securities 163, ,157 Interest rate swaps 96,946 (60,253) 36,693 Total Assets at Fair Value $ 325,281 $ 260,103 $ $ (60,253) $ 525,131 Liabilities Interest rate swaps $ $ 60,253 $ $ (60,253) $ Total Liabilities at Fair Value $ $ 60,253 $ $ (60,253) $ (a) PEFCO has elected to net the fair value of derivatives when a legally enforceable master netting agreement exists. U.S.Treasury Bills included in cash and cash equivalents have maturities of three months or less. As such they are reported at amortized cost which approximates fair value due to the relatively short time between acquisition and maturity. U.S. Treasury and U.S. Guaranteed Securities are recorded at fair value on the balance sheet. The fair value of U.S. Treasury Securities is generally determined using market prices provided by data providers (level 1) and the fair value of U.S. Guaranteed Securities is generally determined using dealer quotations (level 2). Interest rate swaps - The fair values were based on model valuations (level 2) using market-based inputs. The fair value generally reflects the estimated amounts that PEFCO would receive or pay to replace the contracts at the reporting date. PEFCO did not have any assets or liabilities that were measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended September 30, 2018 and PEFCO did not have any assets or liabilities that were measured at fair value on a non-recurring basis during the years ended September 30, 2018 and There were no transfers between Level 1 and Level 2 during the years ended September 30, 2018 and

54 NOTES TO FINANCIAL STATEMENTS 12. RELATED PARTY TRANSACTIONS Certain shareowners (or their affiliates) have provided and presented a variety of services to PEFCO, including underwriting the issuance of PEFCO s long-term secured notes and unsecured medium-term notes, providing liquidity back-up lines, purchasing loans in the secondary market, and other banking services. 13. GENERAL AND ADMINISTRATIVE EXPENSES General and Administrative Expenses were as follows: Year Ended September 30, (In thousands) Compensation and benefits $ 5,199 $ 6,014 $ 6,315 The following table summarizes fees paid to shareowners during 2018, 2017, and 2016: (In thousands) Administrative 3,313 3,210 2,985 Professional fees 1,481 1,066 1,508 Total $ 9,993 $ 10,290 $ 10,808 Underwriting services $ 949 $ $ Liquidity lines 1,696 1,615 2,365 Other banking services Interest received from shareowners was as follows: $ 3,402 $ 2,198 $2,985 (In thousands) Interest received $ 3,844 $ 1,899 $ 1,168 The following table summarizes loans purchased from shareowners in the secondary market during 2018, 2017, and 2016: 14. OPERATING LEASE PEFCO has executed as lessee an operating lease for the rental of office space through November Rent holidays and rent escalation clauses are recognized on a straight-line basis over the lease term. Leasehold incentives are recorded as leasehold improvements and amortized over the shorter of their economic lives or the term of the lease. For the years ended September 30, 2018, 2017 and 2016, PEFCO recorded lease expense related to these agreements of $664 thousand, $648 thousand and $642 thousand, respectively, which is included in the accompanying Statements of Operations in Administrative expenses. (In thousands) Loans purchased $ 292,107 $ 96,391 $ 268,200 PEFCO had derivative contracts with certain shareowners as follows: (In thousands) September 30, 2018 September 30, 2017 Receivable, net $ 1,334 $ 20,713 Payable, net $ Future minimum lease payments under the lease as of September 30, 2018 were as follows (in thousands): 2019 $ Total $ 729 PEFCO has a relationship with Ex-Im Bank as described in Note 2, Agreements with Ex-Im Bank. 15. SUBSEQUENT EVENTS PEFCO has evaluated subsequent events through December 11, 2018, the date the financial statements are available to be issued. No subsequent events requiring adjustment to, or disclosure in, the Financial Statements were noted, other than the following: On November 8, 2018, the Company issued at par, $200 million of fixed-rate collateralized notes, paying interest semi-annually at 3.266%, maturing November 8,

55 MANAGEMENT S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING TO THE BOARD OF DIRECTORS AND SHAREOWNERS OF PRIVATE EXPORT FUNDING CORPORATION Private Export Funding Corporation ( PEFCO ) maintains a system of internal control over financial reporting which is designed to provide reasonable assurance regarding the preparation of reliable published financial statements. The system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. Even an effective internal control system, no matter how well designed, has inherent limitations including the possibility of the circumvention or overriding of controls and therefore can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in con ditions, internal control system effectiveness may vary over time. PEFCO s management assessed its internal control over financial reporting as of September 30, 2018, in relation to criteria for effective internal control based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsor ing Organizations of the Treadway Commission. Based on this assessment, PEFCO believes that, as of September 30, 2018, its system of internal control over financial reporting was effective. Timothy C. Dunne PRESIDENT & CHIEF EXECUTIVE OFFICER December 11, 2018 Michael J. McNally SENIOR VICE PRESIDENT & CONTROLLER December 11,

56 FIVE-YEAR FINANCIAL DATA In thousands, except per share amounts Year ended September 30, Loan Commitments Commitments for year $ 379,000 $ 165,000 $ 292,000 $ 1,995,000 $ 1,562,000 Commitments, cumulative from inception 36,655,000 Selected Assets Cash and cash equivalents, time deposits, and investment securities $ 1,158,223 $ 1,485,908 $ 1,494,699 $ 1,322,373 $ 1,900,779 Export loans guaranteed or insured by Ex-Im Bank 4,719,642 5,705,564 6,939,197 7,824,681 7,301,740 Other guaranteed loans 50,497 63,301 89, , ,484 Selected Liabilities Short-term notes $ 908,995 $ 1,818,626 $ 2,088,674 $ 2,179,281 $ 2,175,814 Long-term debt 5,036,590 5,341,774 6,383,332 7,014,912 7,074,619 Other Financial Data Net income (loss) $ (11,225) $ (2,958) $ (595) $ 2,246 $ 6,605 Net income (loss) per share (631.11) (166.29) (33.46) Dividends Average shareowners equity 133, , , , ,257 Return on average shareowners equity (8.40%) (2.10%) (0.40%) 1.53% 4.61% 54

57 INDEPENDENT AUDIT FEES INDEPENDENT AUDIT FEES PEFCO currently utilizes the services of Deloitte & Touche LLP for audit, other audit-related services and tax services. PEFCO s Audit Committee is responsible for the pre-approval of all audit and permitted audit-related and tax services performed by the independent auditors. The fees incurred in 2018 and 2017 were as follows: Audit Fee $ 430,000 $ 341,500 Audit Related Fee 196,500 20,000 Tax Fee 75,000 73,500 Total $ 611,500 $ 435,000 55

58 BOARD OF DIRECTORS DIRECTORS (1) (4) (7) Richard S. Aldrich, Jr. Executive Chairman PEFCO (1) (3) (5) (6) Timothy C. Dunne President & Chief Executive Officer PEFCO (1) (3) Mary K. Bush Chairman BUSH INTERNATIONAL, LLC (2) (5) David A. Dohnalek Senior Vice President Finance & Treasurer THE BOEING COMPANY (1) (5) Benjamin M. Friedman William Joseph Maier Professor of Political Economy HARVARD UNIVERSITY (2) (3) John A. McAdams Former COO EXPORT-IMPORT BANK OF U.S. (4) (5) Andrew J. O Brien Global Head of Loan Capital Strategy J.P. MORGAN (2) (4) (8) Samir Pandiri BNY MELLON Diane S. Reyes Group General Manager Global Head of Liquidity & Cash Management HSBC (1) (3) William R. Rhodes President & CEO WILLIAM R. RHODES GLOBAL ADVISORS, INC. (1) (2) Rita M. Rodriguez Former Ex-Im Bank Director (2) (5) Paul Simpson Global Banking & Markets Operations & Regions Executive BANK OF AMERICA MERRILL LYNCH (3) (5) Francesco Vanni d Archirafi Vice Chairman ICG EMEA CITIGROUP (1) Member of the Executive Committee (2) Member of the Audit & Compliance Committee (3) Member of the Nominating & Governance Committee (4) Member of the Compensation & Management Development Committee (5) Member of the Risk Policy Committee (6) Mr. Dunne is an ex-officio member of the Audit & Compliance Committee and Compensation & Management Development Committee (7) Mr. Aldrich is an ex-officio member of the Audit & Compliance Committee, Nominating & Governance Committee, and Risk Policy Committee (8) Mr. Pandiri served on the board through September 30,

59 OFFICERS OFFICERS Richard S. Aldrich, Jr. Executive Chairman Timothy C. Dunne President & Chief Executive Officer David T. Attisani Assistant Vice President Alexis M. Hollywood Assistant Vice President & Assistant Controller Gordon L. Hough Senior Vice President Michael J. McNally Senior Vice President & Controller Ann Marie Milano Vice President & Secretary Rajgopalan Nandkumar Senior Vice President & Treasurer Francoise M. Renieris Vice President Melinda A. Scott Assistant Vice President 57

60 ADVISORY BOARD The Advisory Board provides feedback to Management on loan policy, lending rate policy, scope of activities, relationships with borrowers, commercial banks, other co-lenders, Ex-Im Bank and on such other matters as Management may request. Their guidance and strong support contribute greatly to the success of PEFCO and are highly appreciated. We are also appreciative of the active participation of Ex-Im Bank. ADVISORY BOARD Jeff Cain Managing Director Siemens Financial Services Carla Campos Director HSBC Securities (USA), Inc. Piers Constable Director Deutsche Bank AG Raj Daryanani Director BNP Paribas Bruce Drossman Senior Vice President General Electric Valentino Gallo Managing Director Citicorp Global Markets Patrick Gang Executive Director Bank of America Merrill Lynch Jon Boudreau Vice President J.P. Morgan Chase Bank Tim Gaul International Export Finance Manager Caterpillar Financial Gemma Bae Managing Director ING Capital LLC Kristi Kim Senior Director Boeing Capital Corporation John King Senior Vice President Textron Financial Phillips Lee Managing Director Societe General Jerome Festa Managing Director Wells Fargo Bank Jeffrey Windland Vice President & Asst. Treasurer Orbital Science Corp. 58

61 PEFCO SHAREOWNERS PEFCO s stock is owned by 26 commercial banks, one financial services company, and six industrial companies. In the case of the commercial banks, the shares are owned directly or through an affiliate. Ownership and transferability of the common stock of PEFCO are restricted to Qualified Investors. As defined in the By-laws, a Qualified Investor is a financial institution or a corporation engaged in producing or exporting United States products or services. Under PEFCO s By-laws, no shareowner may own more than 18% of the outstanding shares. The following is a list of shareowners as of September 30, 2018: Commercial Banks Number of Shares Financial Services Companies Number of Shares Bank of America 1,924 The Bank of Miami, N.A. 280 The Bank of New York Mellon 702 Bank of the West 79 Brown Brothers Harriman & Co. 38 Citibank, N.A. 1,507 Citizens Financial Group, Inc. 1,549 Deutsche Bank 1,066 HSBC USA Inc. 441 ING Capital LLC 267 Investec Investments Ltd. 108 JPMorgan Chase & Co. 2,937 Key Bank 165 MUFG Union Bank N.A. 93 Natixis 738 Paribas North America, Inc. 367 PNC Bank Corp. 503 Regions Bank 20 Silicon Valley Bancshares 42 Société Générale 100 Standard Chartered Bank 300 Sterling National Bank & Trust Company 39 UBS AG 137 UPS Capital Business Credit 431 U.S. Bank N.A. 500 Wells Fargo & Company 816 Assured Guaranty Corp. 212 Industrial Companies Number of Shares ABB, Inc. 80 The Boeing Company 1,425 General Electric Company 567 KBR, Inc. 113 Textron Inc. 40 United Technologies Corporation 200 Total 17,786 59

62 ADDITIONAL INFORMATION PRIVATE EXPORT FUNDING CORPORATION 280 Park Avenue, New York, NY Telephone: (212) Facsimile: (212) INTERNET COMMON STOCK PEFCO is its own transfer agent and registrar for its common stock, and accordingly, all transfers of stock must be coordinated through PEFCO. For inquiries, contact: Ann Marie Milano, Vice President & Secretary FINANCIAL INFORMATION ABOUT PEFCO, CONTACT: Michael J. McNally Senior Vice President & Controller LONG-TERM SECURED NOTES The Bank of New York Mellon is trustee, registrar, transfer agent and paying agent for all outstanding issues of PEFCO s Secured Notes. MEDIUM-TERM NOTES U.S Bank, NA is the issuing and paying agent for PEFCO s Medium-term Notes. SHORT-TERM NOTES Bank of America, National Association, is the issuing and paying agent for PEFCO s commercial paper. FOR SPECIFIC INQUIRIES CONCERNING PEFCO S LENDING PROGRAMS, CONTACT: Gordon L. Hough Senior Vice President Melinda A. Scott Assistant Vice President INDEPENDENT AUDITORS Deloitte & Touche LLP 30 Rockefeller Plaza New York, NY LEGAL COUNSEL Shearman & Sterling LLP 599 Lexington Avenue New York, NY ANNUAL MEETING 3:30 p.m., Thursday, December 6, Park Avenue, 4th Floor New York, NY TO CONTACT ANY OF THE BOARD OF DIRECTORS PLEASE MAIL CORRESPONDENCE TO: PEFCO Attention (Board Member) Office of the Secretary 280 Park Avenue, 4th Floor New York, NY FOR INQUIRIES REGARDING LONG-TERM, MEDIUM-TERM AND SHORT-TERM NOTES, CONTACT: Raj Nandkumar Senior Vice President & Treasurer 60

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64 PRIVATE EXPORT FUNDING CORPORATION 280 PARK AVENUE, NEW YORK, NY